I am reading George Soros's The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means (New York: Public Affairs, 2008). Soros begins the book by explaining both how he sees the current crisis, why we are in a crisis, and why his theory of reflexivity does a better job than the neoclassical model of perfect knowledge and perfect competition. All would be good, except that somehow laissez faire is both used to describe the model of perfect knowledge/perfect competition (and equilibrium always), and used to describe the policy reality of the past quarter center of credit expansion and lax regulation of the financial markets world-wide.

But I wonder why this sort of contradiction persists in the literature. Soros correctly states that: "We are in the midst of the worst financial crisis since the 1930s. In some ways it resembles other crises that have occurred in the last twenty-five years, but this is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process; the current crisis is the culmination of a super-boom that has lasted for more than twenty-five years."

The super-boom resulted because of "credit expansion, and a prevailing misconception, market fundamentalism (aka laissez faire in the nineteenth century) which holds that markets should be given free rein."

First, explain to me how anyone as well-read and thoughtful as Soros could equate credit expansion and laissez faire? Isn't the very admission of massive credit expansion also an admission that we deviated from laissez faire.

Second, why do we need a new paradigm if the main problems we are identifying in the crisis are (a) the credit expansion, (b) a conflict between expectations in actors as they strive both to understand the situation and also act to change the situation (Soros's theory of reflexivity), and (c) a boom-bust cycle? Why doesn't Hayek's work just fit what is needed in Soros's mind?

Is it the case that the answer to my first question explains the answer to the second? And if so, what can be done to fix the confusions?