TOPICS > Economy

Financial World Shifts Gears Amid Economic Tumult

May 13, 2008 at 6:35 PM EDT
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As the U.S. grapples with an economic slowdown and a housing slump, financial leaders are rethinking their strategies. Financier and author George Soros reflects on the changing business trends and details his new book, which examines the "credit crash" of 2008.
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GWEN IFILL: Now, Judy Woodruff talks to financier George Soros about the nation’s troubled markets.

JUDY WOODRUFF: He’s known by the wider public as a billionaire philanthropist and a liberal political activist, but what enabled George Soros to work on his other interest was and is his success as an investor and money manager.

In his latest book, he warns again about the dangers to the global financial system, but this time he writes about what he sees as the greatest financial crisis since the Great Depression.

The book is called “The New Paradigm for Financial Markets.” And he joins me now.

George Soros, it’s good to have you with us.

GEORGE SOROS, Investor and Author: Pleasure.

'Most serious crisis' in a lifetime

George Soros
Author
I thought it would be done sooner. It has really started since August until now. It's a very, very long time. It is now being brought under control. But the fallout in the real economy is only just beginning to make itself felt.

JUDY WOODRUFF: How do you assess the strength of the financial system today?

GEORGE SOROS: I think this is the most serious crisis of our lifetime. It's not just a housing crisis, but a crisis of the financial system.

JUDY WOODRUFF: And people talk about the credit crunch; they talk about the housing crisis. Are all of those part of this, or how do you think of it?

GEORGE SOROS: Well, every bubble has two parts. There's something in reality, and then there's a misconception connected with it.

In the case of -- the most common kind of bubble is connected with real estate, and the misconception is that the value of real estate is not affected by the willingness of the banks to finance real estate.

And in the aftermath of the IT bubble, interest rates were kept too low too long. And that generated this housing bubble, and housing prices went up double digits for several years. And they are now in the process of correction.

That's the trigger that then expose the other bubbles that were growing. And I contend that there's been what I call a super bubble that has been growing over the last 25 years at least, which basically consisted of an extension in credit, increasing use of leverage. That was the trend in reality.

And the misconception that credit is that markets can be left to their own devices. Now, in fact, they are given to excesses, and occasionally they create crises, but each time the authorities intervene and bail out the failing institutions, provide fiscal stimulus, monetary stimulus.

So it seems like the market corrects itself, but it's actually the intervention of the authorities that saves the market.

JUDY WOODRUFF: You say it's a huge crisis, and yet, for example, just recently -- the other day, the U.S. treasury secretary, Henry Paulson, said he thinks the worst may be over in the credit crunch.

GEORGE SOROS: I think that, in fact, the acute phase, the liquidity has been brought under control of the authorities. That's their job. And it took them longer, frankly.

I thought it would be done sooner. It has really started since August until now. It's a very, very long time. It is now being brought under control. But the fallout in the real economy is only just beginning to make itself felt.

New regulations needed

George Soros
Author
In actual fact, you have to regulate not only the money supply, but you also have to regulate credit conditions, because sometimes you have euphoria, willingness to lend, and then you have panic and contraction.

JUDY WOODRUFF: Can this kind of situation be prevented in the future?

GEORGE SOROS: I believe it can. The regulators have failed to regulate, and they really have to -- they left it to the market. That was this market fundamentalist philosophy, that markets will take care of themselves.

In actual fact, you have to regulate not only the money supply, but you also have to regulate credit conditions, because sometimes you have euphoria, willingness to lend, and then you have panic and contraction.

And you have to control the extension of credit while the bubble is growing. And you need for that new instruments, in fact, not new instruments, because the instruments already exist, minimum reserve requirements, margin requirements, but you must vary those. You have to use them, and you have to vary them, depending on market conditions.

JUDY WOODRUFF: How confident are you, just quickly, that the kind of regulation that's needed is going to be put in place?

GEORGE SOROS: Not at all. I hope that people will learn from this and learn, as they have in the past, a lesson and correct their past mistakes.

JUDY WOODRUFF: People are still asking whether it was fair for the Federal Reserve to bail out or to throw a safety net under Bear Stearns. Any doubt in your mind that was...

GEORGE SOROS: Absolutely the necessary thing. And it is their job to do it. But it is also their job to prevent bubbles from developing, and they have not accepted that responsibility.

Greenspan said explicitly that, "Asset bubbles is not our business." And, in fact, it ought to be the business of the Federal Reserve.

JUDY WOODRUFF: In other words, they should have seen this -- they should have done something much sooner, is that what you're saying?

GEORGE SOROS: That's right. That's right.

JUDY WOODRUFF: People often say, "Well, George Soros does very well because he bets against what everybody else is assuming is going to happen." Have you done well under these current economic conditions?

GEORGE SOROS: I did well last year. This year, I'm slightly underwater, because I'm actually -- I've managed to offset my other -- the people to whom I give money to manage by my taking those positions. But we're slightly on the losing end.

And I'm pretty satisfied with that, because we are currently in a state of wealth destruction. So if you can preserve your wealth in those conditions, you're doing very well.

JUDY WOODRUFF: You follow international markets; you follow commodities very closely. A lot of worry, concern right now about the price of crude oil, the price has shot up. Some say it could go to $200 a barrel. How concerned are you?

GEORGE SOROS: I think that that is also a bubble. While we have -- you know, the housing bubble is being deflated, the oil bubble is being inflated right now. And I think it's just a matter of time before that bubble will burst.

There will have to be a correction, although you will never go back to where you were, because you've got problems with finding new oil, and also you have problems with the dollar.

End of an era, but U.S. can go on

George Soros
Author
But I hope that a new order will emerge, with the United States playing a leadership role, but I don't think it will be able to be the sole economic or political superpower that it was.

JUDY WOODRUFF: One of the things you write about in your book is you say, "We are at the end of an era." You say, when this current crisis ends, things are going to be different. When it does end, will the United States still be the world's economic superpower?

GEORGE SOROS: I'm very hopeful that the United States will be the leader, both in politically and economically, but it is not the undisputed supreme power that it used to be.

And it has got to learn to lead international cooperation, instead of imposing rules on others, as the Washington Consensus did, without observing those rules ourselves, which is what we did when we developed a current account deficit that amounted to more than 6 percent of our gross national product.

JUDY WOODRUFF: And are you confident that that kind of cooperation will...

GEORGE SOROS: I think the world will need it. Right now, we are in a period of heightened uncertainty. Almost anything can happen.

But I hope that a new order will emerge, with the United States playing a leadership role, but I don't think it will be able to be the sole economic or political superpower that it was.

JUDY WOODRUFF: George Soros, his new book, his latest book, "The New Paradigm for Financial Markets." Thank you. It's very good to have you with us.

GEORGE SOROS: Thank you.

JUDY WOODRUFF: We appreciate it.