Jul 1, 2008 12:00 PM

, By Michael E. Lewitt

By Michael E. Lewitt

Half a century ago, the economic historian Karl Polanyi argued in the classic book The Great Transformation that self-regulating markets never work and that government intervention always becomes necessary to prevent catastrophe. Buried toward the end of the book is a short but succinct sentence that describes much of what we are seeing on Wall Street today: “The financial market governs by panic.”1

The first half of 2008 saw plenty of panic as investors and regulators scrambled to deal with unprecedented losses and the collapse of a major investment bank. Polanyi’s view is echoed today by George Soros, one of the most successful investors in history, in The New Paradigm For Financial Markets, a book published in May 2008 in the midst of a market crisis that Soros believes “marks the end of an era of credit expansion based on the dollar as the international reserve currency.” 2 The first six months of 2008 saw the U.S. dollar drop to record lows against the Euro as global investors increasingly lost confidence in America’s economic policies and watched as authorities had to intervene in the markets in novel ways.