This is largely based on Soros' testimony on June 3, 2008; so it's not explicitly about the current crisis. It's an interesting read though:
While I am not myself an expert in oil, I have made a lifelong study of investment bubbles as a professional investor. My theory of investment bubbles, explained more fully in my recent book, The New Paradigm for Financial Markets, is considerably different from the conventional view. According to my theory, prices in financial markets do not necessarily tend toward equilibrium. They do not just passively reflect the fundamental conditions of demand and supply; there are several ways by which market prices affect the fundamentals they are supposed to reflect. There is a two-way, reflexive interplay between biased market perceptions and the fundamentals, and that interplay can carry markets far from equilibrium. Every sequence of boom and bust, or bubble, begins with some fundamental change, such as the spread of the Internet, and is followed by a misinterpretation of the new trend in prices that results from the change. Initially that misinterpretation reinforces both the trend and the misinterpretation itself; but eventually the gap between reality and the market's interpretation of reality becomes too wide to be sustainable.
The misconception is increasingly recognized as such, disillusionment sets in, and the change in perceptions begins to influence the fundamental conditions in the opposite direction. Eventually the trend in market prices is reversed. As prices fall, the value of the collateral used as security for loans declines as well, provoking margin calls. Holders of securities must sell them at distressed prices to meet the minimum cash or capital requirements, and such selling often causes the market to overshoot in the opposite direction. The bust tends to be shorter and sharper than the boom that preceded it.
This sequence contradicts the conventional view, which holds that markets tend toward equilibrium and deviations from the equilibrium occur in a random manner. The widely used synthetic financial instruments like collateralized debt obligations (CDOs), which have played such an important part in turning the subprime mortgage crisis into a much larger financial crisis, have been based on that view.
In fact, financial institutions, rating agencies, and regulatory authorities failed to take into account the possibility of initially self-reinforcing but eventually self-defeating sequences of boom and bust. They built their calculations of risk on the wrong premises. When the subprime bubble burst, AAA-rated CDOs and other synthetic instruments suddenly lost a large part of their value. The subprime crisis spread to other markets with alarming rapidity and the solvency of the most creditworthy financial institutions was suddenly thrown into doubt.
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