Soros points out regulated markets fail to operate on market fundamentals, calls for more regulation
Sinclair Stewart, The Globe and Mail
June 29, 2008
NEW YORK – With his 78th birthday approaching, it’s only natural that George Soros has turned reflective, and begun to take the full measure of his legacy. Gazillions of dollars? Check. Respect from powerful peers and world leaders? Check and check. Philanthropic renown, bordering on hagiography? Big check.
And yet, this isn’t quite enough for Mr. Soros. The father of the modern-day hedge fund, the man who has donated billions of dollars to spread democracy in Eastern Europe (and who spent millions in a failed attempt to foil George W. Bush’s re-election bid) now craves something money can’t buy: recognition as a philosopher.
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His theory amounts to a broadside against conventional economic wisdom, and holds that the perceptions of investors have a reflexive relationship with reality — that these perceptions can inform and alter the fundamentals on which supposedly rational markets are based. It is also an attack on market fundamentalism, and the belief that the financial system can resolve its own problems with minimal intrusion from regulators.
That orthodoxy has all but melted alongside the subprime mortgage sector, where indiscriminate lending has dealt crippling blows both to Wall Street and Main Street.
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He created the Quantum Fund, one of the world’s first hedge funds, and when he wasn’t relying on back-pains or gut instinct to guide his trading, he used his theories to help identify potential bubbles — places where investors’ attitudes began to distort fundamentals, creating a vicious circle of self-reinforcing behaviour that would eventually collapse under its own weight.
This latest bubble, he claims, has been more than 20 years in the making, and became acute when banks began moving loans off of their balance sheets via derivative products such as collateralized debt obligations.
For one thing, the new holders of these loans, including hedge funds, were poorly supervised. To compound matters, the products themselves were so complex that the regulators could not properly assess the risk; instead, they relied on the risk management systems at banks and credit rating agencies to monitor potential dangers. Gradually, he claims, the regulators started to believe that markets could self-regulate.
This month, he told a U.S. Senate hearing that speculators are helping to drive up the price of oil, and urged them to act. Although he is encouraged that regulators are beginning to target speculators, and working to deflate bubbles in commodities like energy and food, he doesn’t think the problems have been truly felt yet in the economy at large. Far from it.
At home, the collapse in housing prices is likely only halfway complete, he said; banks could still be riven by massive loan losses; and inflation is threatening even more pain for consumers.
It is on the world stage, though, that Mr. Soros foresees the most profound shift.
He predicts that the coming years will mark an end to U.S. dominance and the greenback’s position as the main international reserve currency, and that this will engender a period of political instability.
Vague, perhaps, but Mr. Soros would argue that’s precisely the point. His theory isn’t about eliminating uncertainty. It’s about embracing it.
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