George Soros Interviews

PBS Interview with George SorosHe is a billionaire and philanthropist and Chairman of Soros Fund Management LCC, a privateinvestment management firm that serves as principal advisor to the Quantum Group of Funds.He is the author of The Crisis of Global Capitalism. (Interview conducted in the spring of 1999.)The global economic crisis, if we want to begin to understand the origins of it, from your pointof view, where should we look?You have to look at the system of currency pegs--when a currency is tied to the dollar or toanother hard currency. This peg may not hold, but people assume that there is a fixedrelationship between the dollar and, let's say, the Thai currency or the Malaysian currency. Theythen exploit the difference in domestic interest rates and the international market. They borrow indollars and they lend in the domestic currency. They make a fortune in the process, as long as thepeg holds. But because of, maybe, excessive borrowing, which allows a country to maintain atrade deficit over an extended period of time, or to engage in a currency or real estate boomfinanced by dollars, you have over-heating, trade imbalance, and then the capital flows reverse.People want to take their money out, instead of putting it in, and you have a crisis.You've written and spoken about the deeper trends that are going on in the financial marketstoday.I put forward a pretty general theory that financial markets are intrinsically unstable. That wereally have a false picture when we think about markets tending towards equilibrium.Equilibrium is appropriate when a market deals with known quantities. But in financial markets,you deal with unknown quantities. You're trying to discount the future. But the future depends onhow you discount it today. It's not something fixed, so your discounting can't correspond to thefuture.Now, there is the prevailing theory which holds that financial markets should be regarded as if they were in continuous equilibrium. I think that is actually a false image. Because, in effect,they are in continuous disequilibrium. Therefore, they are given to going to excesses in onedirection or another. You can have a boom and a bust. Now, in practice, we have learned thatthat's the case. Through experience, we have evolved a system of central banking that preventsthese excesses from going too far. Controlling the money supply, dampening the boom so thatyou don't get a bust. Then stimulating the economy [that] is in decline. You have variousregulatory authorities and so on.We now have global markets. We don't have an appropriate international mechanism forregulating the global financial markets. That's a problem. We have the Bretton WoodsInstitutions--the International Monetary Fund and the World Bank. But they were created for adifferent world, a world in which there were no capital movements. In fact, these institutionswere designed to make trade possible in the absence of international lending, and so on. Theseinstitutions adopted themselves to changing circumstances.

You also had, at the time, fixed exchange rates. So the fixed exchange rate system broke down.Global capital markets developed. The institutions, the IMF, is not adequate to meet thesecircumstances. It adapted itself and did reasonably well in one crisis after another. There was abig international crisis in the '80s ... mainly focused in America. Then you had the Mexican crisisin '94. Now, you had this latest crisis. Here, the IMF method proved to be inadequate. So theirintervention became part of the problem, instead of being part of the solution.You criticize people who you called, "market fundamentalists." Tell me what their theory is, andwhy you're critical of it.Well, market fundamentalists recognize that the role of the state in the economy is alwaysdisruptive, inefficient, and generally has negative connotations. This leads them to believe thatthe market mechanism can take care of all the problems. Get the state out of there. The marketsare perfect. In fact, they will take care of themselves.The first part of the proposition is correct. The second part is false. Just because stateintervention is imperfect, is full of negative effects, doesn't mean that markets are either stable orprovide social justice. Or are appropriate for certain functions that society needs, but cannot be,in my opinion, provided by the market. So it's carrying the belief in markets to an extreme,which is, I think, today very, very dangerous.So do you think that the markets today have too much power?Well, they are too influential. They have penetrated into areas of society where they weren'tpreviously, or to a much lesser extent. For instance, they have come to dominate the professions.Law has become a business. Health care has become a business. Unfortunately, politics has alsobecome a business. That really undermines society.Since the middle of 1987, beginning in Thailand, it tends to be the countries, themselves, whoare blamed by many for the problems, for the crisis. You've seen some other unifying themes ...That's right. I mean, of course, there is something wrong in the policies followed by thosecountries. But the crisis affected a great number of countries, some of which followed verydifferent kinds of policies. There is, however, a unifying theme. That is the role of capital flows.The capital flows themselves can be destabilizing. I mean, it's sort of an innate feature of markets. It's very good to have capital flows, but you also have to recognize that they can bedestabilizing. Therefore, you need some mechanism to prevent them from creating thesedislocations ...As you said, you consider this situation quite dangerous.Well, I do.Why?

Well, so far, there have been tremendous economic dislocations, tremendous human suffering asa result of what happened in financial markets, affecting what is now called innocent bystanders.Millions of people who are not entrepreneurs, who hadn't made any decisions, didn't borrowforeign currency. A lot of them, rather poor people, who have actually benefited over the years,in an improvement in their standard of living. Suddenly a collapse--losing their jobs, havingmuch less income, much higher prices, and so on. Losing their savings, in the case of currenciesthat collapse.So tremendous dislocations. They have occurred in what I call the periphery of the globalcapitalist system. These are the countries that have been attracting capital or using capitalcoming from abroad. It has, if anything, actually benefited us and our economy, because we havehad the benefit of cheaper imports. Its incipient inflationary tendency was nipped in the bud.Actually, we were on the verge of perhaps having higher interest rates, which would have pushedus into a slow-down. Because of the financial crisis, we actually got lower interest rates and anew shot of stimulus.So we, if anything, benefited. It's very hard right now to convince people that there is somethingreally wrong, because they don't feel it themselves. But if they look abroad, they can certainlysee it. In my view, there is a very good chance that the next crisis, which may happen in the nextfew months, or the next new years ... we'll actually have a similarly or maybe not quite asseriously disruptive effect, but a negative effect on our economy.I say it's not going to be so serious because we gave a very effective institutional framework toguard against it. So it's not likely to be as severe as it was, let's say, in Indonesia or Brazil. Butnevertheless, it could have a negative effect in our economy. If that were to happen before therest of the world has recovered, then you would have a worldwide depression similar to whathappened in the 1930s.Because if we began to have problems ...Well, because, right now, people suffer some dislocations in our economy. People lose jobs, aswe turn to cheaper imports from Mexico or from other parts of the world. But there's tremendousnew job creation. Actually, our unemployment is very low. The economy is really veryprosperous. We aren't overheating. It's probably the best of all possible worlds. But if you nowstarted to go into slowdown, and people who lost their jobs couldn't find new jobs, then theoutcry against cheap imports and the loss of jobs, would become politically much morepowerful.As it is, we are imposing some restrictions, for instance, on imports of steel, because they are, infact, flooding our market. That protectionist sentiment would then become much stronger. Thenyou would start disrupting international trade, as a result of the disruption of financial markets.Then you would get into a problem that the countries that have to repay their debts would not beable to earn the hard currency, which they need, in order to service their debts. So that you wouldhave financial distress, as well as interruption of trade.