George Soros about crisis, mistakes of the US government and the ways to recover

The name of George Soros is famous throughout the world. Being one of the richest persons in the world George Soros doesn’t try to keep back that he has earn his money by speculating. Everybody remembers Black Wednesday in 1992 when Soros has managed to sell short more than $10 billion worth of pounds and “broke the Bank of England”. It was just a beginning of his star way. Today he is a respected financial speculator, stock investor, philanthropist, and political activist, whose opinion is greatly appreciated and highly rated. 

 

 

In his interview to Nathan Gardels from New Perspectives Quarterly George Soros has told about the world financial crisis, the main mistakes of the US government and the lesson he has learned from the whole situation:

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.

The speculator doesn’t think that the current situation is about the housing bubble. According to him 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. And now we see its great explosion.  

When asked about the efforts of the U.S. government to save the national economics and their notorious $700 billion rescue package George Soros was very critical seeing the main problem in the wrong direction of the government. 

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.

Having defined the mistakes of the government George Soros has also proposed his solution to overcome the crisis. 

- 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, concluded he. 

However, having solved this problem the US will face another one, thinks the expert. The thing is that the repairing of 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.

However, even this will not help the US to remain the leader of the world arena. The influence of the US has already declined. For the past 25 years, the US have been running a constant current account deficit. The Chinese and the oil-producing countries have been running a surplus. The US 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.