My Interview with George Soros: End of Financial Crisis Could Be in Sight
George Soros, the financier and philanthropist, is author most recently of The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means. He spoke with me in Washington, D.C., where the IMF and World Bank are meeting, on Sunday.
Nathan Gardels: Let's talk first about the nature of the crisis. Thanks to low interest rates, global liquidity and deregulation, we have had a 25-year, self-reinforcing credit expansion bubble, leading to "irrational exuberance," as it was once said, in financial markets. Now we have the self-reinforcing crash of the stock and credit markets --"irrational despair" -- not justified by the economic fundamentals in the real economy.
How does this pattern fit your theory of reflexivity and your new paradigm for understanding finance?
George Soros: The key to understanding this crisis -- the worst since the 1930s -- is to see that it was generated within the financial system itself. What we are witnessing is not the result of some exogenous shock that knocked things off balance, as the prevailing paradigm, which believes markets are self-correcting, would suggest. The reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.
The paradigm I'm proposing differs from the conventional wisdom in two respects. First, financial markets don't reflect the actual economic fundamentals. Expectations by traders and investors are always distorting them. Second, these distortions in the financial markets can affect the fundamentals -- as we see in both bubbles and crashes. Euphoria can lift housing and dot.com prices; panic can send sound banks tumbling.
That two-way connection -- that you affect what you reflect -- is what I call "reflexivity." That is how financial markets really work. Their instability is now spreading to the real economy, not the other way around. In short, the boom-bust sequences, the bubbles, are endemic to the financial system.
The current situation is not just about the housing bubble. The housing bubble was merely the trigger that detonated a much larger bubble. That super-bubble, created by the ever-increasing use of credit and debt leverage, combined with the conviction that markets are self-correcting, took more than 25 years to grow. Now it is exploding.
Gardels: What ought to be the "circuit breaker" that short-circuits the distortions that inevitably destabilize financial markets?
Soros: If bubbles are endemic in the system, then government regulators have to intervene to prevent bubbles from getting too big. Governments have to recognize that markets are not self-correcting. It is not enough to pick up the pieces after the crisis.
Gardels: Does the presence of the 24-hour global financial news cycle amplify and exaggerate distortions in the financial markets?
Soros: Without question, they accelerate the process. At the same time, I wouldn't overstate it. At the end of the 19th century, you didn't have 24-hour cable, but nevertheless you had the same kind of bubbles. Throughout the 19th century, when there was a laissez-faire mentality and insufficient regulation, you had one crisis after another. Each crisis brought about some reform. That is how central banking developed.
Gardels: How come all the efforts of the U.S. government so far -- the $700 billion rescue package, low Federal interest rates, backstopping deposits and commercial paper -- have not stemmed the crisis?
Soros: The U.S. authorities bought into market fundamentalist ideology. They thought that the markets would ultimately correct themselves. U.S. Treasury Secretary Henry Paulson epitomized this. He thought that six months after the Bear Stearns crisis the market would have adjusted and, "Well, if Lehman (Brothers) goes bust, the system can take it." Instead, everything fell apart.
Since they did not understand the nature of the problem -- that the market would not correct itself -- they did not see the need for government intervention. They did not prepare a Plan B.
As the shock of the Lehman failure set in, he had to change his mind and rescue AIG. The next day there was a run on the money markets and commercial paper markets, so he turned around again and said we need a $700 billion bailout. But he wanted to put the money in the wrong place -- taking the toxic securities out of the hands of the banks.
They have finally now come around -- with the government buying equity in banks -- because they see the financial system is on the verge of collapse.
Gardels: Now that the U.S. authorities are at last on the right track, what are the key components of resolving the crisis?
Soros: The outlines are clear. There are five major elements.
-- First, the government needs to recapitalize the banking system by buying equity stakes in banks.
-- Second, interbank lending needs to be restarted with guarantees and bringing LIBOR (London Interbank Offered Rate) in line with Fed funds. This is in the works. It is going to happen.
-- Third, we must reform the mortgage system in the U.S., minimizing foreclosures and renegotiating loans so that mortgages are not worth more than houses. Stemming foreclosures will cushion the fall of housing prices.
-- Fourth, Europe has to fix a weakness of the Euro by creating a safety net for its banks. While initially resisting this, they have now found religion and done it at their meeting in Paris on Sunday.
-- Fifth, the IMF must deal with the vulnerability of countries at the periphery of the global financial system by providing a financial safety net. This is also in the works. The Japanese have already offered $200 billion for this purpose.
These five steps will start the healing process. If we implement these measures effectively, we will have passed through the worst of the financial crisis.
But then, I'm afraid, there is the fallout in the real economy, which is now gathering momentum. At this point, repairing the financial system will not stop a severe worldwide recession. Since, under this circumstance the U.S. consumer can no longer serve as the motor of the world economy, the U.S. government must stimulate demand. Because we face the menacing challenges of global warming and energy dependence, the next administration should direct any stimulus plan toward energy savings, developing alternative energy sources and building green infrastructure. This stimulus can be the new motor for the world economy.
Gardels: At the end of the day, won't we be looking at a vastly different global financial landscape? The U.S. will decline as the top power. It will have, along with parts of Europe, socialized banks and loads of debt. Communist China will be the new financial power globally, flush with capital and a major investor in the West.
Soros: U.S. influence will wane. It has already declined. For the past 25 years, we have been running a constant current account deficit. The Chinese and the oil-producing countries have been running a surplus. We have consumed more than we produced. While we have run up debt, they have acquired wealth with their savings. Increasingly, the Chinese will own a lot more of the world because they will be converting their dollar reserves and U.S. government bonds into real assets.
That changes the power relations. The powershift toward Asia is a consequence of the sins of the last 25 years on the part of the United States.
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I note my 6:13PM 10/12 post standing without its first part.
The missing part was due to the page limitation and trying to work around it.
But the previous material was simply trying to say that financial changes would not fix the underlying problem, which simply put is, "we don't make anything anymore."
As House Speaker Jim Wright told Reagan, "you can't have an economy washing each others cars and delivering pizza. Voodoo economics is a recipe for disaster covered with depression sauce."
The voodoo economics seems to be just now coming out of the oven.
I am advocating that we develop dramatic new products, which draw on our capabilities for innovation.
Cold hard truth:
By Peter E. Pflaum, PhD
The explanation of the financial crisis is a simple as the common practice of rolling over debts. If a household, firm, bank or financial institution is holding assets bought with borrowed money, such as a mortgage, car, credit card debt, mortgage backed security, or stocks and bonds and the money has to be rolled over on a credit market; they are at risk of having to sell assets in a down market, losing their net worth or capital, or going bankrupt or getting a government bailout (rescue). The fancy models of risk calculated the costs of funds and the returns on the assets owned. They did not figure on the market going dead, friezing up because everyone was in the same condition and in no shape to make new loans but needing to call in their existing loans to maintain equalium. The cash came from societies that have saving into societies that ran up debt buying stuff they can’t afford.
If someone has a house that is “underwater” so the value is less than the market price. If a scheme such as proposed by McCain offers to refinance at a lower mortgage and interest rate the neighbors will notice. Their debts have to be written off or reduced or they can’t continue. The rest of the world has to take a hit of trillions in write off of American debt.
I to admit all the news sources and pre-accounts support all this, but I have to quetion How long did we see the signs? I'm not an expert, never been given that consideration, but there are people who credit themselves to be and with that they assume the responsibility of carring the "whistle". These people have failed our country and it's people, and some times they get to walk away from the problem with out any concern. FUNDAMENTAL ECONOMICS ARE HAVEING FUNDAMENTAL PROBLEMS.
The analists look at what should have been done, what needs to be done, but look at what actually happens. The U.S Government is ineffective, Companies are ineffective, as a nation where does that leave us? Our representatives don't represent the majority (Maybe representing the majority is to socialist), the companies are boundryless (maybe if they where that would effect their bottom line). So the only people who become Pro-American are the people who can only live here, and not take their lives or business out of the country.
When these people saw the signs Why did it take them thirty years to fix it?
We need to rethink our leadership.
I find it remarkable the credibility given to Warren Buffet and George Soros as economists. They may very well be successful financiers, but every word they speak oozes with self-interest and every action they support remains beneficial to the upper crust.
The structural inequities in the U.S. economy have been reinforced by every administration since Reagan. For years before Iraq, we were told we could not afford a single payer health care system. For year, low wages were promoted by failing to raise the minimum wage or guarantee wage levels for the cash-only labor force. Now we have a new load in the $1 trillion bailout.
Budget deficits and recession puts the economy right between the rock of devaluation of the dollar and the hard place of hyperinflation. High unemployment and no safety nets remaining puts American working people between the rock of the loss of their savings in 401(k)s and the hardplace of their impending loss of jobs. Umm, let me guess, we can't afford new taxes, right?
Sounds like people need to put the stock market into perspective.
Move the NYSE and other stock exchanges in this country to Las Vegas.
Then it would be constanstly in our faces what's really going on with investments daily.
Everyone, please read this article by Ellen Brown.
If ONLY the Federal Gov't would do this!!
Financial Meltdown: The Greatest Transfer of Wealth in History - How to Reverse the Tide and Democratize the US Monetary System by Ellen Brown
link -
http://www
Interesting article...
Much simpler language.
Banks exist to move money from the poor into the hands of the bankers
Soros is right about the crisis being the work of the financial system itself, not the real economy. The "free market" isn't self-correcting, if it was it would have corrected itself by now. But what Soros doesn't acknowledge is the degradation of the real economy. The US doesn't produce anything useful anymore. Our productive economy has been exported to foreign nations who then ship their products to us to buy. This can't work when the consumer (who is also a worker) has suffered from stagnant wages for decades and must borrow to buy things, hence the huge private debt, and negative savings rate. Credit card companies soak the consumer with huge interest rates and charges, further worsening debt. Unproductive jobs, massive loss of productive jobs and declining real wages are the primary economic situation that must be addressed if there is going to be a real economic recovery, a healthy stock market won't be enough. The stock market isn't the most important part of the economy.
I have a little bit of information regarding the state of the economy. Regardless of what these big deal names tell us ,nothing they say matters in the least, because what matters is whether Americans have jobs. If they don't have jobs and can't of won't spend their money then there is no way in hell the economy is going to get better. Until the Big shots who have all the money stashed away in off shore banks are willing to let loose of it and reinvest in American jobs and Americans then nothing is going to get better. You can't have these experts telling us on the one hand that Stock market money is merely a fiction of the mind and then turn around and pretend all is well just because the stock market goes up a day or two. It's still all fiction.
One problem here--though I agree that, at present, we are the largest consuming nation in the world--if Asia is producing and not being rolled over by markets and leaders bent on driving the people out and down; like we are, their population is set to become not only the producers of production, but the biggest comsumers as well--in other words, they will have the discretionary income (jobs) that we don't, who needs us?
I think it is human nature to shout gloom and doom. This does not necessaily mean that George Soros is wrong. It does mean that he is wrong approximately half of the time, but those instances do not get the same press, especially when we are going thorugh high-profile negative world events.
I am much more optimistic. I can recall a time not so long ago when many of the America bashing pundits were proclaiming that Japanese manufacturing had surpassed us and that we would have to learn Japanese and count our money in Yen.
Well history proves otherwise. Largely fueled by the rise of the PC (personal computer) and the internet revolution and American workers' productivity rise, we had a booming economy in the 80s and 90s.
I see a lot of potential for future optimism. When you look at it closely, all China has is cheap labor - a commodity. Great economies are not built on commodities, but innovation. America has the best universities and institutions of higher learning and research on the planet by a country mile over any other country.
I see a future where America once again leads in new technologies and innovation in alternative energy, transportation, medicine and yes, the next generation of computer technologies leading perhaps to a different kind of manufacturing paradigm that relies on expensive (skilled) labor rather than cheap labor.
To some extent, I don't care who wins the election. This time I am voting for America.
"America has the best universities and institutions of higher learning and research on the planet by a country mile over any other country."
The problem is that 75% of all Ph.D. candidates are foreigners, here for the education, and intent upon returning when completed.
They are required to return to their home countries under Federal Law
I admire your optimism and I'll add a few facts for future use. The U.S. ranked 18th among the richest nations in 2002 and has sunk even lower the last few years.
http://www
WORLD EDUCATION RANKINGS
UNICEF rankings of educational systems in the world's richest countries, indicating the percentage of 14 and 15 year olds scoring below a minimum level in literacy, math and science.
1. South Korea 1.4 percent
2. Japan 2.2
3. Finland 4.4
4. Canada 5
5. Australia 6.2
6. Austria 8.2
7. Britain 9.4
8. Ireland 10.2
9. Sweden 10.8
10. Czech Republic 12.2
- (tie) New Zealand 12.2
12. France 12.6
13. Switzerland 13
14. Belgium 14
- (tie) Iceland 14
16. Hungary 14.2
- (tie) Norway 14.2
18. United States 16.2
19. Germany 17
- (tie) Denmark 17
21. Spain 18.6
22. Italy 20.2
23. Greece 23.2
24. Portugal 23.6
If we are to stop the trend the U.S. is on of lowered socioeconomic standards of it's working class population, we must rein in corporate control of our Congress politicians. Their subservient obeyance to corporate demands of outsourcing, less pay, higher working hours, and an assortment of laws designed to increase the profit margin to already fabulously wealthy individuals, while doing nothing for the country itself, must be stopped and reversed.
Why is it that issues relating to the economy always bring out the crazies and their crackpot theories? George Soros has forgotten more about the financial markets than any of us commenters will ever know. It would behoove us and our representatives to mind what he says. He may not be an infallible oracle, but his views are far more sound than the voodoo supply-side Reaganomics that got us into this predicament.
dmbraddy, You place far too much faith in people who are big shots just because they have some money. It's people with money who got us into this mess in the first place because they insist on hoarding it all. There are no experts, There is no one out there who can give the right advice. You believe if you want to but don't expect everyone else to do it.
edva,,
My guess is that one of the reasons why the oil industry is raising their prices so much is because with the profits they will invest in and corner the market on sustainable energies. Just another way to keep us beholden to them. Rule number one for Corporations they must keep the public dependent on them. This is the only way to maximize profit.
Artos,
This is why if the government is putting forth any money whatsover for research and development of alt energy, they should stay government run programs.
I shouldn't say if. These big companies never do research and development without a good dose of corporate welfare...
It's great to know that the biggest world wide financial crisis in almost a century is almost over and the end could be in sight, and even before I receive even one penny of the unemployment compensation I filed for back in August. I guess I should have recognized the sign when I received a statement last week saying I was being paid for six weeks of unemployment. If they had sent just one weekly unemployment payment in place of the letter, I would have had enough cash to take advantage of the new lower fuel prices and go to a job interview where I could commiserate with the thousand or so folks the Dallas School District is in the process of laying off. (Are there really recession proof jobs?). I might even have avoided being late on the car payment that was due last Friday. I presume that the coming of the first unemployment check will signal the end of the crisis, discounting of course any personal pain I might feel at the coming of the pending massive global depression.
By the by, the American consumer under the Republicans has not been the motor of global economic expansion but rather the patsy of the administrations' pet banks in developing bogus securities to dump in foreign markets in order to finance golden parachutes. Ask them how they feel about big government now that it is their ox in the ditch.
The elephant in the room is of course the tremendous inequality and concentration of wealth into the hands of the few that has occurred during the heady days of free credit, low wages, and trickle down economics proposed by the right. Now that the failure of this ideology maybe we can design a system that allows for wealth building while at the same time puts certain limits on greed and instability. It is truly ironic that the raw capitalist ideology has at the end produced a socialist solution.
Charleydan, your arguments and ways of thinking are right in line with GW’s – you just cannot seem to let go of an ideological point of view that negates human nature. The “free market” ideology that you seem to promote does not work because the market “is not free” it cannot be “free”. It is unfair and unjust because it runs on capital, influence and knowledge. Those without capital, ability to exert political or financial influence or without the necessary comprehension (knowledge) are at a distinct disadvantage. This is of course the perfect picture of America’s overworked, indebted and underpaid Middle class
The “market” is a human construct that allows for the trade of goods and services. It is not holy or divine. We human beings create and tinker with it. I like to use the analogy of traffic. Who in his or her right mind would propose to let traffic be free and unfettered? Let “the traffic” decide; let it seek equilibrium and let it balance things out! Could you imagine the mess? Well we have been getting into such a situation now since the arrival of Reagan’s ideas into power. Deregulation has been the mantra of the right, because it favors those with wealth and knowledge.
It's not that Topdog doesn't get what you are saying. It's that he doesn't care. Look at his screen name and his previous comment that human rights don't exist (no one is entitled to anything by virtue of human birth). This is a person with sociopathic tendencies who doesn't mind the "corrective" experience of a depression, including all the death and suffering it will inflict upon millions, because he doesn't believe he will be one of the ones suffering, and couldn't give a rat's a#% about anyone else. What we all need to get is that there are a lot of people in this world with very primitive ideas about the common good. And these people often have power they wield from behind a mask of smiles and folksy friendliness to inflict great harm upon our society.
I appreciate Soros's wisdom, and his concern for the non-millionnaires around him. He knows he's okay no matter what, but clearly cares to about the well-being of all members of his nation, and indeed the human family worldwide.
George Soros, not a man that I trust with my wallet or freedom. One needs to study all of his endeavours to see if they want a part of socialism with him at the top.
Capitalism works under all society structures.
Let me note here that I broke several weeks ago, much of what you now say Soros says, here on this site..
Keneysian and Austrian. Austrian requires everyman to work for what he gets. Keneysian allows manipulation of the markets with inflation and deflation and creates big governments that go broke eventually.
Do not mix up boom and busts with inflation and deflation cycles.
Boon and busts are like dot.com or gold rush. Confined to a certain area.
Inflation and Deflation is caused by Fed's making money. Making to much money causes inflation that requires deflation to bring things back to value and affects the whole society and government. This system is used to steal wealth from the populist to use for government programs that they would not allow taxation for.
Creating money takes not only GNP from us it often creates inflation. This creation of money allows governments to pay for their humanity programs and corporate welfare, lobbyist payoffs. Creating an ever enlarging government.
The rich are very aware of these cycles and use them to gain great wealth. Soros loves it. Buffett operates under Austrian.
This system will eventually bring the world economics to its knees. One should ask Soros about that?
George Soros is a man undoubtedly qualified to find a way to extend the system that has enriched his brilliance.
We shouldn't hold that against him, just be aware of it.
Regarding that FED money policies cause inflation, deflation, bubbles and bursts - may I remind you that the word Federal is an illusion as ALL of that money creation is done by the private banking cartel licensed by the government, using fractional-reserve banking.
Most of what you decry as government malaise in the money system is, in fact, caused by the intrinsic nature of that private banking money creation process, which is that all money is created as debt.
It is the repayment of that debt at interest that steals from future GDP, in a way that disadvantages the masses.
It is THAT truism that steals wealth from the common man among us.
Do not Austrian economists agree that the problem is debt-money, and that a resort to 100 percent reserve banking is the solution?
If so, the true failure of the government is in transferring its own money-creation powers to the private banking system in a debt-money scheme.
It is not in the government creating the money.
Your criticism of government is misplaced.
Rather than reject government action, the need is to reject the debt-money system, and as the Austrians agree, establish a debt-free money system in this country.
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