Soros: The Crisis, Part 2

Transcript:
ZAKARIA: And we're back with George Soros.

Tell me what it is that you think should be done, because I've been reading you. You wanted a different kind of plan than Paulson's plan. But it appears that what is being done now is much closer to what you wanted. That is to say, the banks are being recapitalized, or at least some of them are recapitalized.

SOROS: But they are not yet. You see, what has happened is that - I said that the Paulson plan was ill-conceived. It was basically the same kind of financial engineering that got us into the trouble that they wanted to use for getting us out of it. And it was just the wrong thing.

And it's very - would have been very harmful to waste - I mean, unfortunately, he has been behind the curve all the way, and still is. And that's why ...

ZAKARIA: Paulson.

SOROS: ... the market is now collapsing. He just is not able to sort of come to terms to what needs to be done.

ZAKARIA: Why do you think that is?

SOROS: Because I think that he has bought into this market fundamentalist ideology. He did not want to dilute the shareholders, which is what is necessary at the present time.

ZAKARIA: Do you think not bailing out Lehman was a mistake?

SOROS: Yes. That's what actually kind of unleashed the current phase of meltdown.

And unfortunately, the authorities have lost control of the situation. And that's why the markets are behaving this way.

ZAKARIA: But now, aren't they - Paulson has announced that they'll recapitalize the banks and ...

SOROS: No, they haven't. He has not announced. And it's very important how it's done. I think it could be done, this $700 billion could work. Although you also have to do something to stabilize the housing market.

ZAKARIA: Right. But first let's talk about the recapitalization.

What do you want that's different from what he said this week?

SOROS: It needs to be done properly. And in this way, I think he could certainly - I would be, for one, would be very interested in buying into some banks at distress price, and others would, too. So actually, you could mobilize private capital. You would then replenish the banks.

Then you would say, for the time being, we lift the minimum reserve requirements. You don't need to have eight percent; you only need to have six percent. So you can increase your balance sheet, then the banks would start competing for loans. It would turn everything around.

But as I say, the other element that needs to be dealt with is the ...

ZAKARIA: The housing.

SOROS: ... stabilizing the housing market.

ZAKARIA: OK. So, let's talk about the other element, which is stabilizing housing, because it is housing that is ...

SOROS: Absolutely.

ZAKARIA: ... the underlying asset that keeps going down.

SOROS: Yes. If you - and it is liable to overshoot. So, what you need to do - you can't help the market's going down when it's above sustainable levels.

So, it's not a question of stopping the market from going down, but stopping an overshoot.

ZAKARIA: So, how would you do that?

SOROS: Basically, the important thing is to reduce the number of foreclosures, because foreclosures are putting extra pressure on. Which means that the mortgages have to be renegotiated, and a new form of mortgage issued, which is a sounder mortgage than the current one, to replace it, which the householder could afford to pay and would not exceed the estimated value of the house. In fact, let's say it would not exceed 85 percent of the estimated value of the house.

And the rest would - the loss would be absorbed by the mortgage owner. But the loss is less that way than the losses that they are going to suffer if the house goes to foreclosure.

ZAKARIA: But, so, what you would do would effectively renegotiate all these mortgages, so that people are not foreclosed on ...

SOROS: That's right.

ZAKARIA: ... in some way or the other.

SOROS: That's right.

Now, they will stay in their houses. That would reduce the supply. And since - and then, mortgages would be available at the advantageous - basically at an interest rate based on the government bond market, because it would be guaranteed by the government up to 85 percent of the value of the house.

So, people would then, who are currently renting, would want to buy.

ZAKARIA: And this is good social policy also, in a sense, because keeping people in houses ...

SOROS: Yes.

ZAKARIA: ... is good for the neighborhood. You evict somebody from a house ...

SOROS: Absolutely.

ZAKARIA: ... the value of every house in the neighborhood would go ...

SOROS: It reduces - it reduces the social damage, and it just - it would stabilize the whole situation.

It would, of course, result in losses, which would be then made up for by the recapitalization of the banks, so that you have a banking system that can finance business.

So, this way you would - with some loss, of course - re- establish. And you would have a short recession, not a long one.

ZAKARIA: George, you are in an unusual position. You have been a skeptic or a critic of this new globalized world of finance, of the deregulation, of the enormous fluidity of capital markets - but you have massively benefited from it. You have been able to play the game that you play in the hedge fund space, precisely because of all these forces.

So, is it a good thing, or is it a bad thing?

SOROS: Well, there is no contradiction, because I think I understand how it works, and I understand its flaws. And so, I seem to be reasonably successful as an investor.

But as a citizen, of course, I would like - first of all, I would like the market mechanism to work better. It's much better than government controls.

So, I'm a believer in the market system. But I also recognize that the market system is flawed, because all human constructs are flawed, and we need to improve them. And I hope to see it improved.

ZAKARIA: But government then would also be flawed. I mean ...

SOROS: Well, of course, government is - I mean, this is the important thing to learn. I mean, this is what my book tries to explain, that it is the human condition that perfection is unattainable. And just because, let's say, socialism has failed and government controls are inefficient doesn't make markets perfect.

Markets are also imperfect. So you do need regulation, knowing that the regulators are also human.

And what is worse, they are bureaucratic and they are subject to political influences, so you want to rely on them as little as possible. So, you want as little regulation as possible, but you want better regulation.

ZAKARIA: We'll be right back with George Soros