Legendary hedge fund manager George Soros has expressed concern that the lessons of the current downturn are not being correctly learned by the world's economic policy-makers, who may be storing up more trouble for the future.
Yesterday the chairman of Soros Fund Management said that the financial crisis had proven that the idea of self-correcting markets was false and that it was dangerous to leave asset bubbles to deflate spontaneously.
'Markets, far from reflecting the underlying reality accurately at all times, are always distorting it,' he told participants at the Wall Street Journal's Future of Finance Initiative. 'We have to recognise that, because of that, you can go very far in initially self-reinforcing, eventually self-defeating, boom-bust cycles, or bubbles. Therefore, you can't leave the markets to correct themselves.'
Soros argues that the downturn has driven the final nail into the coffin of the efficient markets hypothesis, which contends that the state of markets fully reflects all the information available to participants.
'What has happened is that the efficient market hypothesis has been discredited, the evidence is just too overwhelming,' Soros told The Australian recently. 'But instead of accepting reflexivity, the [economics] profession is veering towards behavioural economics and what is called the adaptive systems or adaptive markets hypothesis. And I am worried about that, because I think that this will perpetuate the mistake.'
Soros also insists that policymakers need to distinguish between the two issues of stopping the collapse of the financial system and fixing its fundamental problems, arguing that the solutions are 'diametrically opposed' to each other. That\'s a thought for the G20 leaders to bear in mind when they meet next week.