Effect of Feedbacks on the global Financial systems

This is the work currently pursued by one of my Professor Prof. Indranil Chatterjee ( AKA IC).

The following is a transcript of a lecture given by George Soros at Central European University on October 27, 2009.

Negative feedback occurs when the output of a system acts to oppose changes to the input of the system; with the result that the changes are attenuated. If the overall feedback of the system is negative, then the system will tend to be stable.Examples are : Geasers, Appraisals

Positive feedback seeks to increase the event that caused it, such as in a nuclear chain-reaction. It is also known as a self-reinforcing loop. Positive feedback loops are more interesting because they can cause big moves, both in market prices and in the underlying fundamentals. But positive feedback processes do not necessarily run their full course; they may be aborted at any time by negative feedback.

Using this logic we can understand the pattern for each Boom Bust behaviour in our markets.The current boom bust process is not over yet and there might be more skeltons left in the cupboard .Also it is very complex as we have mortage, green, and much more complicated instruments involved in it. We will try to analyse the another comprehensive bubble of 1987 in the global markets using the feedback system.

I have developed a theory about bubble-bust processes, or bubbles, along these lines.

• Every bubble has two components: An underlying trend that prevails in reality and a misconception relating to that trend. A boom-bust process is set in motion when a trend and a misconception positively reinforce each other. The process is liable to be tested by negative feedback along the way. If the trend is strong enough to survive the test, both the trend and the misconception will be further reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved.
• A twilight period ensues during which doubts grow, and more people loose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup said: we must continue dancing until the music stops. Eventually a point is reached when the trend is reversed; it then becomes self reinforcing in the opposite direction.
• Let me go back to the example I used when I originally proposed my theory in 1987: the conglomerate boom of the late 1960s. The underlying trend is represented by earnings per share, the expectations relating to that trend by stock prices. Conglomerates improved their earnings per share by acquiring other companies. Inflated expectations allowed them to improve their earnings performance, but eventually reality could not keep up with expectations.

i realize that my theory of financial markets is still very rudimentary and needs a lot more development. Obviously I cannot do it on my own. So I may have been premature in putting forward my theory as the new paradigm. But the efficient market hypothesis has certianly prooved inadequate: has been conclusively disproved. The entire edifice of global financial markets that has been erected on the false premise that markets can be left to their own devices has to be rebuilt from the ground up.

http://www.soros.org/resources/multimedia/sorosceu_20091112/financialmarkets_transcript