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The Soros doctrine
Soros has 11 billion dollars to his credit. When banks were going bust, he was going up by 2 billion, so if anyone has backup to his view of the financial crisis of 2008, Soros is one of them.
Soros, like Nicolas Taleb, is an advocate of Karl Popper, yet unlike Taleb, Soros was actually at the LSE when Popper was there, and at the time, Paul Volker, ex-chairman of the Federal Reserve was also at the LSE. Ideas of mindsets can be drawn.
Soros devides his book two fold- one philosophical which he talks about his own philosophy, the theory of reflexivity, and economics as a social science. He then provides a brief, yet summarizing history of the super-bubble that led to this economic crisis, and then moves on to outline what are the potential mistakes that governments and bankers alike made. I say potential, because what Soros correctly mentions, is that economics is a social science, and can never be perfect, because a significant amount of what happens in the markets, is based on the actions and re-actions of the players operating in these markets. Thus, economics cannot be a science in a pure sense of the word, because science is the explanation of natural phenomena that is independent of human intervention. Based on this, and his Popperian-Sorosian philosophy explains the relative unreliability of analysis on market behaviors, and that is why bubbles form and then inevitably burst- the only difference between 2008 and the crisis of 1986,87, 1997, the dot com bubble, is that this was a super bubble that almost caused the entire system to collapse.
Soros does a good job, and made a statement that remains true long after the book was published, is that governments will not allow the banks to fail because history does not repeat itself : the failure of the banks in 1929 led to the great depression, and this won't happen- and did not happen this time.
Decent introduction to Soros's ideas 
The main problem with George Soros's books is that he finds it impossible to leave himself out of them. His core ideas are actually very interesting and his interest in Popper surprised me, as I assumed traders never lifted their heads from their screens and wouldn't read a book and certainly not one on Philosophy.
The main two concepts are reflexivity and radical fallibility, reflexivity is basically the idea that we are both subjects and objects in the market at the same time, our perceptions affect the market and vice versa. Radical fallibility basically means we construct our reality (a Kantian idea, originally) and that we are prey to all kinds of errors and mistakes on account of that (unknown, unknowns anyone?).
He lays out the basics of his ideas here, and if you've read any of his books before you'll be familiar with them by now. He then goes on to describe the current situation - its origins and possible fixes for the current mess we're in. At the end of the book he describes his trading for a few months, although interestingly doesn't really have much success!
By now the classical economist must be a very battered figure, I fully agree with Soros that the attempt to reduce markets to natural science is a huge error (see The Black Swan: The Impact of the Highly Improbable for more on this theme). The classical paradigm both overestimates and underestimates human nature (greed/ fear) and has little to offer during market booms and crashes and it radically underestimates downside risk.
So this book is quite concise, lays out Soros's ideas neatly, keeps his rampant ego pretty much in check and offers a decent description of the current crisis. However there aren't many useful new ideas here and not many new ideas on future policy here. If you've read one of Soros's books before rent this one from the library, otherwise it's really worth a read.
Russell's paradox in the financial markets
George Soros has forgotten more about finance, economics and trading than most of his critics will ever know. He has made more money than most of his critics put together will ever make. So when George Soros speaks on matters to do with money, I listen, and when he writes a new book, I read it.
When Soros speaks about politics, which he frequently does, I also like to listen. He is a sharp critic of the United States especially under the policies of the Bush administration, as well he should be since we'll be paying for the stupidities of the Bush administration both nationally and internationally for many years to come. But here in this book, he puts aside (for the most part) the political and concentrates on one of his pet ideas, which he calls "reflexivity."
This is the idea that human interactions and the "truth" of those interactions are shaped not only by fundamentals and events in the natural world but by our perception of those events. This might be called the Heisenberg uncertainty principle as applied to the social sciences, markets and interpersonal relationships. The value of a stock is influenced by a feedback loop that is in part based on the perceptions of buyers and sellers. This makes the value of a stock or commodity a moving target forever in flux. As in Russell's self-referential paradox, reflexivity makes it impossible to accurately predict where markets will go, or to predict in principle the direction of human activities. Simply put, there is a quality in economics, the financial markets and like phenomena that is self-referential leading to uncertainty. Soros concludes that markets do not tend toward equilibrium and they are not "efficient" and price fluctuations are not "random walks" away from a "true" value. Finally, he concludes that financial bubbles arise because the self-referential quality of markets is not understood by economists and others in the financial world.
Here's how he puts it more generally at the start of Chapter 1: "...our understanding of the world in which we live is inherently imperfect because we are part of the world we seek to understand." (p. 3)
Soros sees reflexivity as a "two-way feedback loop, between the participants' views and the actual state of affairs. People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation." Our decisions, he contends, have dual functions. One is the "manipulative function," the other is the "cognitive function." As we try to understand the world, we also try to manipulate it to our advantage. He notes, "The two functions operate concurrently, not sequentially." This "creates an indeterminacy in both the participants' perceptions and the actual course of events." We are (of course) "obliged to form a view of the world, but that view cannot possibly correspond to the actual state of affairs." We are obliged "to act on the basis of beliefs which are not rooted in reality."(pp. 10-11)
Taking a clue from cognitive psychology, evolutionary psychology and neuroscience, it is clear that we construct (as the postmodernists are wont to remind us) a "reality" within our heads that only approximates the "real" world and is biased by our needs and desires and is limited by both our senses and our ability to make meaning of what we perceive. Soros's reflexivity is in essence putting a name on something that has generally been known (but mostly ignored) for a long time.
A consequence of Soros' view is "the postulate of radical fallibility" which, when applied to financial markets allows one to "assert that, instead of being always right, financial markets are always wrong." (p. 76) As for financial bubbles and what follows, he writes (all in italics for emphasis on page 78), "there has to be both some form of credit or leverage and some kind of misconception or misinterpretation involved for a boom-bust process to develop." Of course he is referring most directly to what he calls "The Current Crisis and Beyond" which is the title of Part II of the book.
In Chapter 7 Soros makes some predictions about what is to come. The last note in the book is dated March 23, 2008. I read through the "outlook," and from the perspective of today (February 13, 2009) it's easy to see that Soros is substantially right. He is not only an expert on international markets but a fine connoisseur of bubbles and the opportunities they present. "Nothing is quite as profitable as investing in an early-stage bubble," he writes. (p. 129)
Soros has a way of saying the obvious that some of his critics have disparaged, but sometimes the obvious is what we overlook. According to his "new paradigm" based on reflexivity, "events in the financial markets are best interpreted as a form of history. The past is uniquely determined, the future is uncertain. Consequently it is easier to explain how the present position has been reached than it is to predict where it will lead." (p. 104)
I would add that this is what economists are quite expert at: telling us what has happened. Guessing what is going to happen is what Soros is very good at.
Too repetitive for my liking 
While no one can doubt Mr Soros abilty as an investor I found this book extremely repetitive. The disucssions present would have been better presented in a concise paper, rather than being allowed the wandering musings that this book allowed.
Of course there are interesting parts to the book and for this reason it warrants 3 stars, also it is interesting to here Mr Soros talk about his own investment decisions, policy ideas etc in the second section of the publication.
This book can be read quickly (couple of hours) and as such the repitition is not offensive, just I felt the read could have had more substance if greater detail ahd been provided rather than restating general theories in duplicate.
Worthwhile the reading regardless of the merits of Soros' paradigm
This is a short and very insightful book regarding the ongoing financial crisis, but be aware that, as the title suggests, Soros' main purpose for rushing publication (April 2008 still in the midst of this crisis) was to put forward and test the validity and importance of the theory of reflexivity, a new framework or paradigm he is proposing for financial markets and social sciences in general. Part One of the book deals almost exclusively with the concepts and details of the refined version of his paradigm, which Soros first proposed in his 1987 book The Alchemy of Finance. He explains that reflexivity was his guiding framework during his very successful trading years, however his proposal was never taken seriously in academic circles. He is convinced that the ongoing international crisis will provided the opportunity for his proposed paradigm to finally be taken seriously and further developed by others.
Most of the book's content in Part One presents the rationale for this new paradigm but unfortunately most of the discussion is in the grounds of philosophy, and heavily influenced by the ideas of philosopher of science Karl Popper (see The Logic of Scientific Discovery and Open Society and Its Enemies) combined with theoretical concepts from social sciences, economics and some finance. Therefore, Part One is not an easy reading for those unfamiliar with these philosophical and technical concepts, as these chapters were clearly written for an audience of scholars and practitioners. He wants to be taken seriously in the academic world and not just as a successful speculator.
In a nutshell, Soros' reflexivity theory states that contrary to classical economic theory, which assumes perfect knowledge, neither market participants nor the regulators can base their decisions purely on knowledge. Their misjudgments, biases and misconceptions affect market prices, and more importantly, market prices affect the fundamentals they are supposed to reflect. He claims that markets never reach the equilibrium postulated by economic theory and financial models, and therefore policies and predictions based on market fundamentalism are both false and misleading. He explains that outcomes are subject to diverge from expectations, and he claims that markets move away from a theoretical equilibrium almost as often as they move towards it, and they can get caught up in initially self-reinforcing but eventually self-defeating processes.
Fortunately for the general public, Soros explicitly gives the readers the option to jump directly to Part Two, where he concisely discusses in detail the roots of the current crisis, along with his criticism to the prevailing paradigm in terms his new paradigm. Whether Soros' new paradigm is right or not, his analysis of past and the present boom and bust bubbles is worth the reading, as the key mistakes, misconceptions and actors self-deceiving behavior is analyzed in depth, and lets you understand why almost nobody saw this crisis coming, despite the lessons learned from previous bubble bursts and warnings by some prestigious individuals.
In Soros view the origin of the present international crisis or super bubble as he called it, can be traced to three trends. A first trend is to be found in the ever increasing credit expansion. Another trend is the globalization of financial markets and the last, the progressive removal of financial regulations and the accelerating pace of financial innovations. The last two trends began in the 1980s, when under Reagan and Thatcher administrations began an excessive reliance on the market mechanism, or what he calls, market fundamentalism, and the inception date of the super-bubble is the 1980s, when market fundamentalism became the guiding principle of the international financial system, and this process started with the recycling of petro-dollars generated by the 1973 oil crisis, and accelerated during the Reagan-Thatcher years. Chapter 6 is particularly interesting in understanding the chain of events and how the previous bubbles and crisis led to the present "super-bubble".
He claims that regulators abandoned their responsibility and because the newly invented instruments were so sophisticated that regulatory authorities did not fully understood these new instruments and lost the ability to calculate the risks involved, and they came to depend on the risk control methods and evaluations developed by the institutions themselves, and even worst, something similar happened to the rating agencies who were supposed to evaluate the creditworthiness of the financial instruments, as they too came to rely on the calculations provided by the issuers of those instruments. Soros found this the most shocking abdication of responsibility on part of the regulars, because if they could not calculate the risk they should not have allowed the institutions under their supervision to undertake them. By relying on the risk estimates of the market participants, the regulators unleashed a period of uncontrolled credit expansion. Soros is particularly critical of value-at-risk calculations, as high standard deviations occurred with high frequency and this warning signal was largely ignored by regulators and participants alike. Here he blames Alan Greenspan for allowing his political views to intrude into his conduct as chairman of the Federal Reserve more than would have been appropriate, and so he missed the chance to stop the real estate bubble.
Even if his paradigm is wrong Soros raises several very interesting and insightful ideas. Paralleling Heisenberg's uncertainty principle Soros asserts that our understanding of the world "is inherently imperfect because we are part of the world we seek to understand" and this introduces an element of uncertainty into the course of events that is absent from natural phenomena. This implies that "social events have a different structure from natural phenomena", and particularly economist do not accept this limitation because this will downgrade their "science", economists have to accept a reduction in their status, no wonder they put up resistance. He claims that financial models are mistaken and they do not represent reality, and its widespread use for the design of synthetic financial instruments is at the root of the current financial crisis
He makes several bold conjectures and among the more controversial ideas he asserts that the ongoing crisis will have far-reaching consequences, resulting in the end of an era, with a decline in the power and influence of the US and a decline of the dollar as the internationally accepted reserve currency. Among other significant changes, he thinks sovereign wealth funds (from China, Singapore, the oil producing Arab-states, etc.) will become important players in the international financial system. He also contends that market fundamentalism is no better than Marxist dogma, as both ideologies cloak themselves in scientific guise in order to make themselves more acceptable, but the theories they invoke do not stand up to the test of reality, they use scientific method to manipulate reality, not to understand it.
The book ends with a chapter on policy recommendations that rather presents Soros' summary on lessons learned for the future and identifies some key social issues that need urgent attention. Among the key recommendations, Soros concludes that obviously the financing industry needs to be regulated in order to prevent excesses, but severe regulation could impede economic development, so the right balance must be found. Leverage has to be controlled even if it results in the reduction in both the size and the profitability of the financial industry.
He also concludes that some of the newly introduced financial instruments are unsustainable and they will have to be abandoned, but the regulators need to gain better understanding of these instruments and they should not allow practices they do not fully understand. Risk management needs to be managed by the regulatory authorities, not the participants, that was an aberration.
Soros also advocates that additional measures are required to avoid foreclosure to allow as many people as possible keep their homes; they are victims of the housing bubble deserving some relief and to avoid the human suffering and social problems that are likely to hit senior citizens, Hispanics, and black communities.
Highly recommended, even if you only read Part Two or if you are skeptical about his reflexivity framework. Personally I think Soros is quite right to question the predictive capabilities of economic and financial models however, I do not think reflexivity is truly a paradigm, but rather one key assumption made in economics, and indeed in some application (such as finance) practitioners got mistakenly carried away and forgot to properly take this uncertainty into account, because then their models would be worthless.
PS: If you enjoyed this book, then I recommend you The Black Swan: The Impact of the Highly Improbable, with a similar but more solid theory on how to deal with uncertainty and risk, and written just before the Financial Crash. Also, Soros just published an update of his book under the new title The Crash of 2008 And What It Means: The New Paradigm For Financial Markets. Be aware that most of the contest is the same, just one chapter is devoted to his analysis on the latest developments of the financial crisis.
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