George Soros on Bubbles and Continuing Economic Troubles
The legendary hedge fund billionaire George Soros was recently part of a panel discussion including other financial and media figures including Mark Hannam, Jonathan Ford, John Gieve, Anatole Kaletsky, and Martin Wolf. This conversation was held in late June. Here is a summary of Soros’ thoughts regarding the economy:
* Many people think the current economic crisis has passed, but they are mistaken.
* Measures taken by bankers and governments to alleviate the problems won’t work, for four reasons:
1. The decline in house prices in the USA is only half finished. In the UK, the decline in prices hasn’t even started.
2. Consumers haven’t really adjusted their spending habits yet.
3. Banks will cut back on lending. This will slow capital spending and business activity.
4. The threat of inflation and rising food/energy prices will lead to continuing problems.
* Regulators and market participants had an incorrect interpretation of how markets truly work. They think markets tend towards equilibrium, but in fact there are self-reinforcing processes that lead to bubbles.
* Regulators have to regulate the availability of credit in addition to the money supply.
* Margin requirements and minimal reserve requirements must be used to prevent market extremes.
* Models of risk don’t sufficiently account for uncertainty.
* One way to control the activity of hedge funds is through minimal reserve requirements, which authorities left up to the banks to decide what was prudent.
* Banks are so concentrated because all of them want to be too big to fail. That’s not a good thing.
* The financial sector is out of proportion to the rest of the economy and should shrink.
* Private equity funds will replace investment banks as the dominant force in the economy.
Source:
http://www.prospect-magazine.co.uk/article_details.php?id=10254