George Soros predicted the burst of the housing bubble two years ago. Fareed Zakaria gets his thoughts on the crisis.
Transcript:
ZAKARIA: George Soros knows more than almost anybody about how markets operate, but he also has genuine insight into how the world operates.
Soros has been one of the most successful investors on the globe. His Quantum Fund, one of the original hedge funds, has an unequaled record of performance. And last year, at 77, he came out of retirement, made some massive bets, and by one account netted himself personally $2.9 billion.
I can't think of anyone better suited to help us understand this crisis. George Soros, welcome.
GEORGE SOROS, CHAIRMAN, SOROS FUND MANAGEMENT: A pleasure.
ZAKARIA: Now that the government - the United States government, is guaranteeing almost every financial instrument in the country.
SOROS: Yes, yes.
ZAKARIA: It can't do this indefinitely.
SOROS: So, you do need this kind of government guarantee. Without it, there would be utter collapse. Right? And this is generally now recognized, which means that the institutions that have this kind of insurance backing them up must be regulated.
ZAKARIA: Absolutely.
SOROS: And so, you need to improve regulations.
ZAKARIA: But can you keep these guarantees indefinitely? Do you foresee a future in which finance is going to be much, much more heavily regulated?
SOROS: Well, it certainly will be. And the slower we move, and the more reluctant we are to do the right things, the more money we'll have to throw at it.
The one thing we have decided, that we are not going to allow the financial system to collapse. That's what happened in the '30s. We don't want that again.
We have crossed the Rubicon. We have started throwing money at the system, and we will keep on throwing money. And this ...
ZAKARIA: And eventually, do you think, because of that fundamental crossing of the Rubicon, eventually the government will win? By which I mean ...
SOROS: Yes, I think eventually, because they do have infinite ability to print money. OK? But the damage will be greater, the cost will be greater.
The whole thing - this $700 billion plan - if it had been better constructed, if they had thought about it earlier, if they would deal with the housing situation, the damage would be less.
So, this government, because it doesn't believe in government, is doing the wrong things. You need a government that believes in government. It also believes in markets and wants to give markets the best, the greatest opportunity, but is trying to govern well.
So you need better regulation, not more regulation.
ZAKARIA: What does this do to America's balance sheet? I mean, the Fed is taking on these huge liabilities. The Treasury is going to spend all this money.
Are we going to be able to make up a lot of this money? Is this presenting the United States with a kind of bleak fiscal future?
SOROS: No, yes. You see, we have gotten into the habit of consuming 6 to 7 percent more than we are producing. And that game is finished. That was part of the bubble. It was one, globalization.
America, as the center of the globalized financial markets, was sucking up the savings of the world. You know, China was buying government bonds.
And this is now over. The game is out. So, it does mean a very serious adjustment ...
ZAKARIA: We'll have to ...
SOROS: ... for America.
ZAKARIA: Which means we'll have to save more.
SOROS: Yes.
ZAKARIA: We'll have to live within our means and ...
SOROS: Yes, yes. Yes, we have been using houses as a piggybank, taking equity out of the mortgages. And that's what we used for savings - instead of savings.
ZAKARIA: What was fueling this bubble?
SOROS: Every bubble has two components: something - some real trend, and a misconception about that trend.
Now, the real trend has been credit expansion, ever-increasing use of leverage. And the misconception has been what I call market fundamentalism, the belief that markets correct their own excesses, that you can leave it to the markets, give them free rein.
And, of course, that's false. The markets don't tend towards equilibrium. And occasionally, therefore, they create financial crises.
But it really started with President Reagan, who talked about the magic of the marketplace, Margaret Thatcher. You see, when they came to power in 1980, then this belief became the dominant creed. And this, then, led to the globalization of markets, the deregulation of markets and the increased use of leverage and all those financial engineering.
Now, since markets don't tend towards equilibrium, but are - left to their own devices, go to extremes and create bubbles. And then the bubbles burst.
We have had a number of financial crises since 1980, and quite a few of them. But each time the authorities intervened, and, you know, merged away the failing institution, stimulated the economy if necessary, lowered interest rates, fiscal stimulus, and so on.
And so, the crises, the previous crises actually reinforced the mistaken belief that markets correct their own excesses.
ZAKARIA: And why isn't it working this time? Because they're trying to do all those things.
SOROS: Because they've reached the end. In the end, bubbles - if the bubbles contain a misconception, as they always do, then it can't be maintained forever. You know, you can grow a very long way, but, in the end, reality rears its ugly head. And that's what happened now.
So, the housing bubble acted as a detonator that exploded the super bubble. So it was like in a, you know, an atomic bomb. You have a small explosion that creates a big explosion. So we had the small explosion in the subprime.
And if you recall, Bernanke at the time said, well, that's a $100 billion hit. We can easily absorb it. But it now turned into what, a $2 trillion hit, because all - one thing after another, because this whole, enormous construct is built on false conception.
It seems, of course, unbelievable. How can such a powerful machine run on false premises?
But that's what distinguishes social constructs from mechanical constructs. If a car is, you know, designed badly, it just won't get you there. But badly designed institutions do actually exist.
ZAKARIA: As long as everybody believes in them.
SOROS: Every ...
ZAKARIA: It's all based on trust.
SOROS: That's right.
ZAKARIA: Is it also going to overshoot on the downside and just in the way that it overshot on the upside? And are we now in that phase?
SOROS: Well, you see, the credit markets have been in distress now for quite some time. The stock market finally is catching up and is now in a sort of capitulation phase now, in the last few days.
ZAKARIA: Do you see a bottom?
SOROS: Well, of course, there will be a bottom. But, you know, one of the things that my theory says, that you can't actually predict the future, because the future depends on the decisions that people take, what all the authorities react, and so on.
So, while you can predict a trend, and you can predict that the bubble is eventually going to burst, you can't tell when. And that's how, for instance, I thought that in '98 already, it would come to some kind of a climax. And I was wrong.
ZAKARIA: We'll be right back with George Soros.
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