Thursday, June 10th, 2010
The following is the text of a speech Soros gave at the Institute of International Finance in Vienna. It’s actually rather interesting to plough through, as a number of puzzles have been tabled for our consideration. However, this is time elegantly wasted, for it misses the point. His analogy of the delicate two-stage operation to correct the course of a skidding car is brilliant in that it highlights precisely what is wrong with Keynesian monetary policy – as bubbles collapse, the inflationary manipulation of an economy requires policy makers to have that sense of precisely when the tires begin to find purchase in the gravel to turn the wheel. Or, perhaps a boarding analogy would be apt – on either water or snow, you’re riding the knife’s edge of a system of balanced factors atop a wave. Toe forward or back a little too much and you’re face forward into the surf. However, this is where Soros’ analogy breaks down, because his argument is premised on Keynesian market manipulation as a given, as a natural process. In reality, it’s no more natural than using a magic power to mess with our driver/surfer by altering the coefficient of friction of the road surface, or the viscosity of water on the fly – it introduces a third variable which markets are ill-equipped to compensate for. Drivers should not have to worry about the additional risk of driving into quicksand, or snowboarders into slush, any more than is natural. Yet this is what happens when you manipulate the money supply, this is the root of moral hazard.
Soros, true to form, is again blaming the ‘unseen hand’ of markets for the rather more prosaic hands-on activities of regulators that monkey with the delicate machinery of economic systems. Even on the most benevolent interpretation of the motivations of our money masters, a political dimension is introduced whereby the choices of influential market actors (large private and central banks granted the ability to inflate currency through leverage or the creation of money) creates a situation where ‘reflexivity’ is amplified and even the most experienced surfer of economic waves not privy to the additional variable is wiped out.
Soros’ suggested tonic for the action of the third variable? To introduce a fourth variable and grant regulators the power to manipulate the viscosity of credit. Surely we can see where this is headed. To find the tonic, visit the Von Mises Institute website, which advocates the opposing ‘Austrian’ economic theory.
Related: Soros warns Europe of disintegration | Man who broke the Bank of England, George Soros, ‘at centre of hedge funds plot to cash in on fall of the euro’ | Davos 2010: George Soros warns gold is now the ‘ultimate bubble’, calls for IMF to handle climate fund | George Soros Calls for World Currency and “New World Architecture” | Soros: China Will Lead New World Order | Soros points out regulated markets fail to operate on market fundamentals, calls for more regulation
George Soros, The New York Times
June 10, 2010
In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 – global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.
As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.
This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.
The first phase of the maneuver has been successfully accomplished – a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.