The right-wing hate machine has demonized George Soros in recent years because of his support for progressive causes and candidates. (I think there has also been an element of xenophobic anti-Semitism to those attacks – Soros as the symbol of the “International Conspiracy of Jewish Financiers.”) But if you went back and reviewed his political and financial critiques during that time I think you would have a hard time finding anything to fault. In fact, he looks prophetic. His biggest crime, of course, was vocally and financially opposing the right’s Dear Leader. Now that Dear Leader is the most unpopular president in history that seems like a harmless offense. But at the time it was sure to bring on a chorus of hate.
(I met Soros at a friend’s cocktail party a few years back and thanked him for his fearlessness in supporting unpopular causes that no one else in the public arena would touch – like reform of our disastrously ineffective “war on drugs” – and he just shrugged and said in his heavy Eastern European accent, “I don’t have to please anyone.”)
Soros was interviewed by Bill Moyers on PBS Friday. You can see the video here.
He states many views that I share: For example, that the current financial crisis is the popping of a decades-long credit bubble, that the near-term solution is equity infusions into banks not the purchase of toxic assets, that we can no longer sustain a consumer-oriented culture that spends beyond our means and runs up huge current account deficits, that we should impose a carbon tax rather than pursue a cap-and-trade system, that we should be investing in long-term alternative energy solutions, and that any ideology ultimately fails.
Here is the transcript (with some editing and tightening on my part):
GEORGE SOROS: There has been some kind of an ideological excess; namely, market fundamentalism for the last 25 or so years. And now that world is collapsing...
BILL MOYERS: What do you mean "market fundamentalism"?
SOROS: It's that markets will correct themselves, that you should leave it to the markets, and there is no need for government intervention in financial affairs. Letting markets run rampant. That doesn't work.
Markets have the ability to adjust and they're very flexible. There is this invisible hand, but it is also prone to be mistaken. In other words, markets, instead of reflecting reality, always look at reality with a bias. There is always a prevailing bias. I'll call it optimism/pessimism.
Sometimes those moods actually can reinforce themselves so that there are these initially self-reinforcing but eventually unsustainable and self-defeating boom/bust sequences or bubbles. And this is what has happened now.
This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive.
MOYERS: Why wouldn't the government be able to look at what you looked at and see what's coming?
SOROS: Because actually they have been working on false premises. This sounds very strange, but there's been this belief of market fundamentalism, and particularly the idea that markets always revert to the mean and deviations from the mean occur in a random fashion and you can calculate it. And you will get a nice distribution and you can anticipate it. And based on that, you can manage your risk. Actually that was based on a false idea – namely, that the markets are self-correcting – because the market moods have a way of affecting the fundamentals the markets are supposed to reflect.
And there's always a divergence between our perception and what actually exists. For instance, take the simplest situation, namely housing. Banks give you credit based on the value of the houses. But they don't seem to somehow understand that the value of the houses can be affected by the amount of credit they are willing to give. Now, we've developed these fabulous new ways of securitizing mortgages, which has made credit much more amply available.
And we've been able to calculate risk. Therefore, we were willing to give more and more credit. And that has pushed up the value of the houses. Also, of course Greenspan kept interest rates too low, too long. And so you had very low interest rates, easy credit, and house prices have been appreciating at more than ten percent a year for a number of years. And the willingness to lend actually increased. There was an insatiable appetite for these new fangled securities … which they didn't properly understand. And there was always a separation between the people who generated the mortgages and packaged them and sold them to you and the people who owned them. So nobody was paying attention to the quality of the mortgages because they didn't have an interest. They [were] collecting fees. And then there were other people holding the mortgages. … And that was not factored into those instruments. The idea was that by distributing risk, you actually reduce risk. But by separating the principal from the agent, you actually greatly increase the risk. And that was not reflected. And the rating agencies didn't realize it. So they gave triple-A ratings. And then a few weeks later, those triple-A bonds became practically valueless. And that's what has happened.
MOYERS: What happened that we lost control?
SOROS: There was a failure of regulations because they couldn't understand these new instruments. But they said, "Oh, well, the banks have very good risk management techniques. So we leave it to them to calculate their own risks."
And, you see, it wasn't only in the housing market. There were all kinds of other financial instruments. So there was not just one bubble. I describe in my book there is the housing bubble. But this housing bubble, when that burst, it was only the detonator that exploded the bigger bubble, the super bubble, [w]hich is this 25 years of constant credit expansion using greater and greater leverage. The amount of credit in the economy has been growing at, I don't know, I don't know the exact figure, but maybe at least twice as fast as the economy itself. I think it's more like three.
[Ed. Note: See my review of Kevin Phillips’ “Bad Money” for more on this theme.]
And now, suddenly, you have a contraction of credit. And it's a sudden thing. And it's a period of great wealth destruction. …
MOYERS: So as we talk, Secretary Paulson and the government seem to be coming around to what you've been advocating and that is taking taxpayer money, public capital, and injecting it directly into the banks — in effect, nationalizing some of these banks. Why do you think that will work when everything else has failed?
SOROS: We are determined to put the money in, not to allow the financial system to collapse. And that's the lesson we learned in the 1930s. It's an important lesson. But because we are behind the curve, the amounts get bigger and bigger. If we understood it earlier, we could have brought it to a halt perhaps sooner. But they've got still a number of things to do. And this idea of just buying noxious instruments off the balance sheet of the banks was a non-starter. … [I]t was the wrong idea.
This is the end of an era. … [The era] where America could actually, for instance, run ever increasing current account deficits. We could consume, at the end, six and a half percent more than we are producing. That has come to an end.
… We are in a downward spiral.
MOYERS: How long will it go on?
SOROS: [T]he one thing that my theory says is that you can't predict the future because the future depends on how you react to it. So if we do the right things then things will be less painful. If you do the wrong things, they'll be more painful. Now, so far we've been doing the wrong things. I very much hope that we'll have a different government in a few months and they'll be doing the right things.
MOYERS: Don't be shy. What do you think the new government should do?
SOROS: First of all you have to prevent housing crisis from overshooting on the downside the way they overshot on the upside. You can't arrest the decline, but you can definitely slow it down by minimizing the number of foreclosures and readjusting the mortgages to reflect the ability of people to pay. So you have to renegotiate mortgages rather than foreclose.
And you provide the government guarantee. But the loss has to be taken by those who hold the mortgages, not by the taxpayer. … The homeowner needs to get relief so that he pays less because he can't afford to pay. And the value of the mortgage should not exceed the value of the house. Right now you already have 10 million homes where you have negative equity. And before you are over, it will be more
… And I hope that they will have a new secretary of treasury, somebody else.
MOYERS: You don't think Paulson's up to it?
SOROS: Unfortunately, I have a negative view of his performance. He represents the very kind of financial engineering that has gotten us into the trouble. And [his first idea] was buying off the noxious [assets]. Before that, he wanted to create a super special investment vehicle to take care of the other special investment vehicles. That didn't fly. And they are now within a week recognizing that they have to change and inject money into the banks to make up for the hole in the equity because those banks lost money. And they can't make it up by taking their assets off their hands. You have to recognize the losses and replenish the equity.
MOYERS: [Where would you put] the bailout money now?
SOROS: Into the capital of the bank so that the capital equity can sustain at least 12 times the amount of lending. That's an obvious thing. And every economist agrees with this. [T]he bank examiners know how those banks stand. And they can say how much capital they need. And they could then raise that capital from the private market. Or they could turn to this new organization and get the money from there. That would dilute the shareholders of the banks. Which I think Paulson wanted to avoid. He didn't want to go there. But it has to be done. But the shareholders could be offered the right to provide the new capital. If they provide the new capital then there's no dilution. And the rights could be traded. So if they don't have the money, other [private sector player] could put in the money. And if the private sector is not willing to do it then the government does it.
MOYERS: The assumption of everything you say is that the government is going to be a big player now in the economy and in the financial markets. But what assurance do we have that the government will do a better job?
SOROS: We don't. Right now they are doing a bad job. So you want to use the government as little as possible. The government should play a smaller role. I believe in markets. I just want them to function properly. To the extent you can use the market, you should use the market.
Governments are also human. They're also bound to be wrong. Moreover, they are bureaucratic. So they are slow and they are subject to political influence. So you want to use them as little as possible. But to not to use them assumes that markets are perfect. And that is a false belief.
I think our ability to govern ourselves doesn't keep pace with our ability to exercise power over nature, control over nature. We are a very complicated civilization. And we could actually destroy our civilization because of our inability to govern ourselves.
MOYERS: Would this all be happening if we still had a strong sense of the social compact? Our social safety net has been greatly reduced. The people have a real sense that the gods of capital have left little space for anyone else. People at the top don't have much empathy for people at the bottom.
SOROS: There is a common interest. This belief that everybody pursuing his self-interests will maximize the common interests or will take care of the common interests is a false idea. It's a suitable idea for those who are rich, who are successful, who are powerful. It suits them to justify enjoying the fruits without paying taxes. The idea of paying taxes is an absolute no-no, right?
[We] need, for instance, a tax on carbon emissions. But that is unacceptable politically. So we are going to have a cap and trade [system]. And the trading will have all kinds of loopholes and misuse of the regulations and all kinds of ways of making money without actually dealing with the problem that it's designed to cure. So that's how the political process distorts things.
[We need to] deal with the mortgage problem. Reduce foreclosures. Recapitalize the banks. And then work on a better world order where we work together to resolve problems that confront humanity like global warming. And I think that dealing with global warming will require a lot of investment.
For the last 25 years the motor of the world economy was consumption by the American consumer who has been spending more than he has been producing. So that motor is now switched off. It's finished. It can't continue. You need a new motor. And we have a big problem. Global warming. It requires big investment. And that could be the motor of the world economy in the years to come.
Instead of consuming, [we should be] building an electricity grid, saving on energy, rewiring the houses, adjusting your lifestyle where energy has got to cost more until you introduce those new things. So it will be painful. But at least we will survive and not cook.
SOROS: Both Marxism and market fundamentalism are false ideologies.
MOYERS: Is there an ideology that is not false?
SOROS: I think the only one is the one that I'm proposing; namely, the recognition that all our ideas, all our human constructs have flaws and perfection is not attainable. We must engage in critical thinking and correct our mistakes.
That's my ideology. As a child, I experienced Fascism, the Nazi occupation and then Communism, two false ideologies. And I learned that both of those ideologies are false. And now I was shocked when I found that even in a democracy people can be misled to the extent that we've been misled in the last few years.