Mapping Economics Onto Reality

 

I was recommending this article to my friends the other day, so I may as well recommend it to you guys too. I know my economics stuff is of minority interest, but how we live is going to be severely bent out of shape for the next few years by this single fact -  the economic theories used for the past two decades did  not map onto reality, and have totally screwed up the financial system, global credit, the housing markets, et bleeding cetera.

 

George Soros, apart from running one of the most successful hedge funds of all time, making a billion in a day by knocking sterling out of the EMS,  and then using the money to prop up democracy around the world,  is a terrific and original thinker on matters economic. (He's greatly influenced me. Those who know me may have have noticed that over the past few years the quality of my economic thinking, and of my predictions, has improved a great deal. A fair bit of that is down to reading Soros.)

 

Here's a juicy and clear-sighted quote from the article, in Wednesday's Financial Times, if you're too lazy to click:

 

"About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises."

The rest of the article is here.

 

In fact, if you liked that, you should read his interesting overview of the background to the crisis, going back sixty years... 

 

And if you're up for a bit of really meaty economic philosophy, there's a good 1994 paper on reflexivity by Soros here...

 

Did I mention I'm reading in Prague next week? Oh, I'll blog about that tomorrow.