Friday, April 10, 2009

Soros Sees Strides in Fixing the Global Financial Crisis

Soros Sees Strides in Fixing the Global Financial Crisis

By the end of the day on Apr. 3, the Dow closed just over the 8000 mark, and a rally appeared to be taking hold on the heels of the G-20 summit in London. But at press time on Apr. 8, the Dow had dipped to 7837—in part because of remarks made by George Soros, the storied hedge fund investor. Two days earlier, Soros called the upswing of the Dow and the S&P 500 "a bear market rally," but he may not be as pessimistic as those words imply. I talked with Soros after the G-20 and again on Apr. 8, and while he remains cautious about the remaking of the world financial system and the direction of the market, he was heartened by the outcome of the summit. Soros, who came out of retirement last year to take charge of Soros Fund Management, now says he is back in retirement mode. Apparently, though, the lion in repose can still scare the jungle.


When do you expect a true turnaround in stocks?


I think we are in for a long period of bottom-building. We had a good bottom in February and a good rally following it. We are going to have a number of bottoms in the years to come. Whether they will be higher or lower than the February bottom, I cannot predict—especially since I argue in my new book [The Crash of 2008] that financial markets are inherently unpredictable.

What was your reaction to the outcome of the G-20?

They pulled a few rabbits out of the hat, and it was a very impressive communiqu [coming out of the meeting]. It was probably [British Prime Minister] Gordon Brown's finest hour. He really did see the need to address the global problem because you have the less developed world facing a potential collapse as the banks don't roll over their loans. I would say this is probably the first time the authorities are actually ahead of the curve. They've managed to forestall a crisis in the developing world.

The money that will be pumped into the IMF could rise to $750 billion. Is that enough?

What's very important is special drawing rights of $250 billion. That is internationally creating new money and will allow countries that are unable to print their own money the way the U.S. can to stimulate their economies. And it will provide additional stimulus for the world, and particularly the part most in need—less developed countries that have been hit by a crisis not of their own creation. So I think it was very important not just for moral purposes but also for our own self-interest because this restart international trade.

When do you expect the U.S. recession to end?

It will take time. The magnitude of the problem cannot be overstated. It is bigger than it was in the 1930s. But [the outcome of the summit] is a very positive development.

FASB [the Financial Accounting Standards Board] says it will relax the mark-to-market rules—the way assets are valued on banks' books. How much will that help?

I remain critical because I think it would have been much more effective to recapitalize the banks, create clean banks that are able to lend. The way the TARP money was spent was very messy and badly done. And because of that, there's a reluctance by Congress to make new money available. So it will take a long time for the banks to dig themselves out. And while they're doing that, they will not be providing sufficient credit to carry on business, they'll be charging a lot, and that generally is going to weigh on our economy.

Are you expecting that we'll see more banks go down?

No, I think it's clear that no major [U.S.] bank whose failure would have a systemic effect will be allowed to go under.

They'll be nationalized?

It would be better to nationalize [the banks] than merely to nationalize their debt and leave them with the profits, because that's really to the disadvantage of the taxpayer.

Secretary [Tim] Geithner says the Treasury should be able to regulate nonbanks such as an AIG. Do you agree?

I do. Basically, this whole financial system collapsed because regulators failed to regulate. There was a belief that markets are self-correcting. That turned out to be wrong. So we have two tasks: One is to arrest the collapse and reverse it, and I think we are making good progress. And what happened at the G-20 is an important step. Now comes the task of rebuilding the financial system from its foundations, because it was built on false premises. That will take longer. There's much less clarity on that than there is on what needs to be done to stop the collapse.

What will the banking industry look like once we emerge from this crisis?

It will look fundamentally different because if you recognize that there has to be a guarantee for the deposits, then you also have to regulate those entities that are guaranteed. So it's not enough to regulate the money supply. You have to regulate credit. And you have to recognize that markets are prone to create asset bubbles and accept the responsibility of preventing those bubbles from becoming too big and self-reinforcing, because that's what a bubble is—a self-reinforcing process. And you have to recognize that markets have moods that regulators must counterbalance. You also have to recognize that if the markets don't know what equilibrium is, then regulators can't possibly know either. So you have to accept that regulators will be wrong. But with the benefit of feedback from the market, you can judge whether you've done too much or too little.

You saw the story about some hedge funds saying: "We're leaving London. The tax situation is not favorable. We don't like business conditions here."

Where are they going, another planet? There's general agreement that regulation has to be global. If you have global markets, you must have global regulation. There is no alternative now with tax havens being brought under control. Hedge funds will have to get used to being regulated.

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