Brainstorming International Finance Crisis

I think that there are several important questions that need to be answered in order to go about solving (or at least attempting to find a solution) to the current financial crisis. After reading Krugman’s book, I think it is important to find out what the origins of the current crisis are by looking at past crises. The crises Krugman highlights seem to be affecting us (the USA/the World) in some form or another. What started the current crisis? When did it start? What got the “ball” rolling in the wrong direction? What exactly is the shadow market?  I have been also reading the George Soros book called “A New Paradigm for International Markets” which, although I have not finished, has shown me new perspective on the situation. In his book, Soros perpetuates his Theory of Reflexivity. Without delving into details, he says that humans are incapable of attaining perfect knowledge because they are a part of the system in which they are trying to understand. This is significant because Economics attempts to solve problems in the way that natural sciences do by testing objective statements using empirical data and trying to use theories based on perfect knowledge until they are falsified. However, in the natural sciences there is a separation between participants views and the actual course of events. In the world of financial markets, there is so much influence on what people feel, or speculate, that it is impossible to separate participants from the course of events that they are participating in. This introduces a high level of uncertainty if the IV and DV variables cannot be controlled from an outside observer like in natural sciences and that is why economics based on perfect knowledge and the idea that markets tend toward equilibrium and deviations from it are random, is INCORRECT, according to Soros. How this relates to my brainstorming is this: Are their patterns of human behavior that influence financial markets and how so? If economics is based on perfect knowledge, but perfect knowledge is unattainable, then do we question the validity of our knowledge about how international markets work? If our knowledge was correct, wouldn’t we have been able to avoid this crisis? Why did governments not take more steps ahead of time to correct the crisis? Or is they did, why didn’t it work? Also, how does this crisis effect the individual? Employment, income, spending, credit, bills, etc… On another note, how does the crises affect developing countries? If there really is a core-periphery relationship between developed and underdeveloped countries, then wouldn’t this financial crisis rock the socks off Third World countries? How do we avoid crisis like these in the future?

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