Thursday, April 3, 2008

Soros - There is a fundamental market misconception (it says so in my book)

From FT Alphaville:

Market fundamentalists (otherwise known as financial authorities and institutions) believe in a tendency toward equilibrium. However, says Soros’ column in Thursday’s FT, this belief in the market’s supposedly random deviations from equilibrium and it’s ability to self correct is basically false.

It is the boom-bust sequence that characterises the market. Soros notes that regulation is not the key, as it can only ever respond after the fact. Authorities need to point their gaze toward the next issue that will arise, CDS and mortgage defaults. Soros suggests that credit default swap contracts could be submitted through a clearing house or exchange with a sound capital structure. For mortgages the bankruptcy laws could be adjusted to allow for mortgage terms to be modified. Another suggestion “would provide Federal Housing Administration guarantees that would enable mortgage holders to be paid off at 85 per cent of the current appraised