George Soros on the financial crisis, military spending, and more

I just had the good fortune to participate in a media teleconference organized with legendary financier and social entrepreneur George Soros by the New America Foundation.  Soros was speaking about his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, which was released yesterday exclusively as an e-book, cost $22.95. (Details here.)

Soros is well-known as a big-picture thinker, and one of the things that fascinated me about the teleconference discussion was how he talked about the deep connectedness between many of the issues that are covered in the Re-engage! book.  For example, he said that though he judged that the United States' military spending on its wars in Iraq and Afghanistan had not yet become a huge burden on national economy, this situation was set to change over the years immediately ahead.  The level of these military expenditures will most likely be rising, he said; and this would act as an ever-increasing burden on the national economy and a motor for inflation.

He also, in response to a separate question, identified investment in pro-green technology as one of the best possible ways to provide a broad stimulus to the economy, now that the stimulus effect of consumption by US consumers can no longer play that role.

In the teleconference, he projected a generally cautious optimism that the worst is past in the current global financial crisis.  In his introductory presentation he mentioned a recent "turning point" min this regard, but did not elaborate on that until I asked him to.  He then said his view was that the global financial system "had a moment of truth in early '07.  Then there was a sort of twilight period until August '07, when we did have the turning-point, and now we have the fallout from that and the financial crisis."

He based his argument on a broad analysis of the thinking of the leading participants in world financial markets.  Basically, he said, the dominant thinking in both the US and the UK since 1980 has been that of "market fundamentalism", including the view that controlling money supply is a sufficient way to control not only money markets but also credit markets.  That view, he said, is based on an assumption that all participants are acting on the basis of perfect information (and also, I would add, that they are all acting in good faith toward each other and everyone else.)  But, he continued, the assumption about perfect information has now been shown to be false; and the imperfections in the information base of leading investors then allowed the rise of "bubbles" at two different levels: the US-based housing bubble, which we have all seen, and also a supervening "super-bubble" affecting the world credit markets as a whole...

He expressed himself as generally hopeful (though by no means certain) that the worst is now past, and that the US authorities will step in with appropriate actions to minimize the negative fallout from the financial crisis. However, in an op-ed in yesterday's Financial Times, he also warned that there are still serious risks ahead:

the authorities ought to prepare for the next shoes to drop. I shall mention only two. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000bn (£23,000bn). To put it into perspective, that is about equal to half the total US household wealth and about five times the national debt. The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred...

The other issue is rising foreclosures. About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises.

My own judgment of the probability that we are "past the worst" in the current crisis is more pessimistic than George Soros's.  This is based not only on information of the kind  he provides there but also on my evaluation of the readiness of the U.S. Congress to undertake a meaningful intervention in the financial arena.

In today's Washington Post, Dana Milbank provided a great public service when he wrote a report of the Senate Banking Committee's hearings into the Federal Reserve's $30 billion bailout of teetering investment firm Bear Stearns in which he listed each member of the committee according to how much money they have received from securities and investment firms.  Hence, he refers to Committee Chair Sen. Chris Dodd of Connecticut not in the usual way as (D-CT) but as  (D-$5,796,000).

The biggest receiver there seemed to be Sen. Chuck Schumer of New York, described by Milbank as (D-$6,162,000).

Milbank was basing his designations on data provided by the Center for Responsive Politics, whose very helpful website is here. Their page on political donations made by securities and investment firms is here.

Regarding George Soros, meanwhile, I have to say I find him a fascinating person with considerable-- if not always well-organized-- intellectual talents. In December 2003, he published a book titled The Bubble of American Supremacy, whose title alone is food for considerable thought. In an article he published based on the book, he made these very accurate observations:

The supremacist ideology of the Bush Administration stands in opposition to the principles of an open society, which recognize that people have different views and that nobody is in possession of the ultimate truth. The supremacist ideology postulates that just because we are stronger than others, we know better and have right on our side. The very first sentence of the September 2002 National Security Strategy (the President's annual laying out to Congress of the country's security objectives) reads, "The great struggles of the twentieth century between liberty and totalitarianism ended with a decisive victory for the forces of freedom—and a single sustainable model for national success: freedom, democracy, and free enterprise."

The assumptions behind this statement are false on two counts. First, there is no single sustainable model for national success. Second, the American model, which has indeed been successful, is not available to others, because our success depends greatly on our dominant position at the center of the global capitalist system, and we are not willing to yield it.

Anyway, I'll be looking for his new book with interest.

Comments

[Jim]

It is so refreshing to read that there are some people who look at history in a broader context than our current administration. However, it will take a mighty struggle and some very intelligent and wise people in the next administration to turn things around.

The biggest problem seems to me that elections seem to turn on sound bites and "swift boat" techniques. How do we get past that?