In Davos, Cutting the Stench of Fear ...

... as with a hot knife through butter was George Soros.

It was great to read Soros' comment in the FT about the housing bubble cum credit crisis -- hear again his unique & sagacious refrain on the price-reflexivity of markets ...

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral.

"The worst market crisis in 60 years" | Financial Times | George Soros | 22 Jan 2008

In this video, he spoke on 24 Jan to FT's US managing editor, Chrystia Freeland ...

Monoline Insurers

"This hasn't played itself out ... "

The Fed

"... in a panicky way ..."

"... hidden problems that haven't yet surfaced ..."

"... credit default swaps ["CDS"] which are very very large ..."

[What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market.]

Monoline bailout?

"... not feasible ... open-ended situation ..."

" ... the banking system cannot function properly and the longer this delay lasts the more likely it is going to affect the real economy."

"Once you use tax-payers' money you also have to regulate."

Fiscal & Monetary Stimulus

"... I don't think it will really work unless you clean up the system itself."

Moral Hazard

"This whole paradigm on which this global financial system is built -- the idea that financial markets tend toward equilibrium -- has to be abandoned."

[That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

He means that if you expect the markets to function properly, you cannot promise to bail them out every time "innovation" and compensation incentives get the better of common sense.]

Insolvency Problem

"I thought that the financial crisis would be solved by now ... the authorities know how to provide liquidity ... but don't know how to deal with this potential insolvency problem and that has progressed and has extended this financial crisis ... once the financial crisis is resolved, then you have the fallout ..."