George Soros, on the phone

This morning, responding to a gracious invitation from the New America Foundation’s Steve Clemons, I got to take part in a media teleconference with George Soros, organized around the release of his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. It was an interesting experience. I’ve been invited to media telecons by a number of different organizations before, but this was the first one I’d participated in. It seemed to work pretty well. Not quite as well as the real thing, since there seemed to be no provision to follow up on the question you’d just asked, if you needed some expansion of the answer you received (as I did.) But in general, a fairly good way to organize a successful, very international media conference at short notice.
You can see the short report of the event that I posted onto the Re-engage blog, here.
Around twenty or so journos got to ask questions. They included people from the UK, Hungary, and elsewhere in Europe, as well as people in the US, including a TASS correspondent here in Washington DC. There was certainly someone who identified himself as working for the Financial Times, but there were also lots of people who did not give their institutional affiliation, which I think was a pity.
George S. is evidently eager to get his book out, and read, very rapidly. It’s being published exclusively as an e-book. I guess that means they won’t even be producing an dead-tree version? Or maybe that one will come out later.
If I’d had more time to talk to the guy, I would certainly have asked him more questions about his own past (and continuing) role as a big-time player in the investment world. He was, after all, one of the main architects of the whole concept of hedge funds and was blamed– with some non-zero justification, I think– for much of the responsibility for the financial crises in East Asia and Latin America in the late 1990s. He seems, like Jeffrey Sachs, to be one of these people who has a big impact on global financial developments and then steps back and starts developing a public critique of the very system within which they had earlier operated– without going nearly as far as I would like to see them go in critiquing their own earlier role in the system.
There were quite a few significant things in what he said. You’ll have to go over to Re-engage to see my main report of the event. I guess the other main thing I’d like to record is that he confirmed, as I’ve heard several people saying in recent weeks, that the huge uncertainties in the financial markets these days mean that rather than investing there investors looking for places to park their money these days are doing so with large investments in commodities markets. (Aka speculation in these markets.) And that that is helping majorly to fuel the current steep rises in the price of basic commodities including food, oil, etc.
Just one last note on George. He operates, intellectually, on numerous different levels at the same time. Among these levels are that of the social theorist and that of the innovative investor. But I think he sometimes muddles them up? His introductory presentation focused on a theoretical critique of what he calls, imho rightly, the “market fundamentalist” approach that has dominated public policymaking in the US and the UK since 1980. His main critique there is that the MF theory assumes that players in financial markets are operating on the basis of perfect information and that therefore any imbalances are self-correcting and therefore only temporary… Whereas in reality, everyone is acting on the basis of highly imperfect information, and therefore you have the possibility of extremely, and non-self-correcting, booms, busts, bubbles, and crises occurring…
But actually, I really don’t believe that most of the big players in financial markets are making their decisions based on any form of social theory, at all. They’re doing so purely with the desire to maximize profit, to either their firms or– probably more commonly– themselves. For such people “theories” about the nature of human society would be purely optional. Also, such people have a massive capacity to weave elaborate justifications (“theories”, we might call them) as to why maximizing their own personal profit is actually both (a) a well-deserved reward for their own brilliance, perspicacity, or other sterling qualities, and (b) actually, good for the whole of society as well.
I am not saying that George S’s theories are of this nature. I think he is a person of great moral as well as intellectual complexity. But I think it’s a stretch for him to imply that there was ever a point during what we might call the Reagan-Thatcher-inaugurated era when the majority of the big bankers and investors were ever actually operating on the basis of any strong “theory” about the nature of human society and the presence or absence of constraints on epistemology. He is far too kind to them all.

12 thoughts on “George Soros, on the phone”

  2. I’d like to make a few admittedly sweeping generalizations.
    As it regards the Thatcher-Reagan era: it was during this period that pirvatization and deregulation too hold. Prior to that, during the Carter administration following the early 70’s economic recession inflation skyrocketed. The central bank chairman at the time, Mr. Volcker, rose interest rates very high to fight inflation. In succeeding in defeating inflation, the central bank also accomplished what in effect was shift power away from of labor to capital by driving down wages. Incomes have never since regained.
    As privatization and deregulation took hold, and going into Bush I and especially the Clinton administration, globalization and ‘free’ trade expanded considerably. In the meantime, the US economy was transformed from a good producing economy into one fueled by asset bubbles and consumption, itself dependent on debt expansion. Debt then served as a substitute for income.
    Beginning especially in the late 90’s new financial instruments were developed that allowed for credit/debt expansion, the bulk of it outside the typical means in which credit is created from the past: by commercial banks. Instead the means of creating credit/debt evolved into investment banks (that depend on investors/speculators/hedge funds and not retail deposits as is the case with commercial banks). Out of this was created newly structure vehicles for expanding debt, which has been termed shadow finance existing outside federal regulatory review. As a result, the tech/stock market bubble was been transferred to the housing bubble, in which mortgage bonds were package and sold on the open market, being bought by institutions such as pension funds and foreign central banks. As the housing bust has gathered steam, the collateral being held by these mortgage bond investors and investment (broker) banks has eroded, leaving depreciating collateral as housing foreclosures increase. These investment banks have kept the mortgage collateral off their books to prevent the market from pricing their truth worth.
    These depreciating mortgage assets have lead banks to ‘write off’ losses, meaning capital is being destroyed. Since Bear Stearns has blow up, the Fed central bank has taken these shady onto its books, which it has not done since the Great Depression, exchanging Treasury bonds for the shady collateral. The fed/reserve bank is not the holder of of increasing amounts of this shady/toxic mortgage collateral, providing banks more liquid assets, i.e. treasuries. The hope is that the banks can re-capitalize themselves and eventually begin to re-start extending credit to borrowers. Essentially, the Fed is hoping that the process will not collapse and the unwinding of debt (deleveraging) and take place in an orderly way.
    However, as the Fed/central bank takes more and more of this collateral, the risk is being shifted from the speculators to the taxpayers, who would be left as the bag holder should the mortgage collateral continue to lose its value, which it most certainly will. The Fed/central bank only has so much reserves. As more and more is taken up by mortgage collateral dumped onto it by the brokers, the risk is that the Fed will itself become increasingly vulnerable. But, the central banks reserves are itself not increasingly made up of toxic mortgage.
    Since the US is dependent on $2bn a day infusions of foreign lending to cover our fiscal and current account deficit, the risk is that as the US banking system becomes more insolvent, and as the Fed attempts to keep banks and the financial system on life support, the dollar will likely weaken more than it already has. Combine this with the US slipping into a deep consumer-driven recession, foreign central banks and foreign private investors will be less likely to buy US Treasury bonds because their incentive to do so is to ensure the solvency of the US economy because US consumers buy their goods. As the US consumer buyers fewer and fewer of their goods, they reduce and stop buying Treasury, especially as the dollar weakens. As the dollar weakens, and as more and more speculators go into commodities such as industrial metals, oil and agricultural products (as an inflation and weakening dollar hedge), thus driving up prices, these countries are experiencing heightened food and energy prices, which has precipitated food riots and hoarding in many parts of the world, from Africa, Asian to the Middle East. Recycling US dollars back to the US by buying Treasuries results in higher commodity prices, for foreign consumers whose income is proportionally much higher for these items than in the US.
    As a result, these countries may decide, as some already have, to de-peg their currencies from the dollar, thus allowing their currencies to appreciate in value as an attempt to hold down domestic inflation. When they sell products to the US the returning dollars are converted into the local currency, which fuels asset bubbles, such as real estate, rising prices. To offset this, they are thus inclined to raise labor prices, which means that ultimate products sold to the US will go higher.
    As the US slides into a deeper recession, selling goods to the US becomes decreases, as does buying Treasuries, Should these countries buy fewer and fewer Treasuries, the yields on US Treasury bonds will spike, thus driving up mortgage yields and for other things US consumers may wish to borrow, thus making the recession in the US even deeper. As this proceeds, the US fiscal deficit will increase as well, especially as fed, state and local tax revenues decline as the recession holds back spending. Thus the dollar will decline further. The US then will have an increasingly hard time both paying off its debt to foreign lenders and in raising borrowed funds needed to prop up our debt. In the end, taxes will need to be cut for entitlements and taxes raised in other areas to compensate for declining tax revenues, which itself will result in increasing layoffs and reduced consumption, creating a vicious cycle.
    The Fed/central bank is taking a very big gamble in its attempt to starve off a financial collapse and to lessen the impacts of a recession. By doing so they risk the bankruptcy of the most debt ridden country in the world.

  3. that the huge uncertainties in the financial markets these days mean that rather than investing there investors looking for places to park their money these days are doing so with large investments in commodities markets.
    Speculation can amplify movements in commodity markets but doesn\t have much to do with long term trends. Oil is high because there is little surplus production capacity in the world and due to demand from Asia, in particular China, not activities of hedge funds ie people like George Soros. If consuming markets didn’t support a high oil prices speculative traders would have to sell their futures at a loss to someone or take delivery, and I know of few hedge funds ready to warehouse thousands of barrels of oil.
    this partly reflect the “theory” under which speculators like Soros are working. That markets are in the very long run more efficient than governments or speculators in deploying capital where it is needed, by sending price signals to corn growers, windmill farm operators, oil export cartels etc. to produce more of their products. Like marxism it isn’t a moral but an economic theory.
    FYI Soros made most of his fortune betting against government intervention in currency markets, most notably “taking on” the central banks of England, Thailand and Russia. I wonder why he now invests central banks with so much faith.
    PS If you’re really interested in keeping the price of oil down you probably shouldnt be flying thousands of miles a month. That might teach a lesson to those nasty speculators! Seriously, air travel is a huge part of the problem. Your frequent trips to the mideast, LA, Canada etc wouldn’t be possible under any equitable CO2 per capita scheme.
    http://news.bbc.co.uk/2/hi/science/nature/4266466.stm

  4. Interesting points, Vadim (and Don).
    Vadim, I personally would not describe my use of air travel as “frequent” these days. In the first one-third of this year I will have made one round trip to the Middle East and one four-legged trip to Victoria, LA, SLC, and back to Dulles. Compared with virtually all other members of the commentatoriat, this is paltry. Also, when on the ground I don’t own a car and try to use mass transit (e.g., the coach trip from Victoria to Vancouver; Santa Monica buses to LAX) or bike whenever possible. I am aware that I am still over my personal “global right to emit”, but I continue to try to lower my personal contribution to emissions.
    I’m glad that you, too, are concerned about these issues. So now, tell me about your lifestyle.

  5. Vadim: “this partly reflect the “theory” under which speculators like Soros are working. That markets are in the very long run more efficient than governments or speculators in deploying capital where it is needed, by sending price signals to corn growers, windmill farm operators, oil export cartels etc. to produce more of their products. Like marxism it isn’t a moral but an economic theory.”
    Oh but it is precisely a “moral” theory, specifically, as Adam Smith pointed out, that the market can more efficiently increase social well-being than other forms of economic organization.
    Sadly, thinking one is doing good is one of the most powerful sources of self-deception — witness our nation’s tragic impact on Iraq, where we first were saving them from an evil dictator and we are now saving them from the chaos which we created.

  6. I only bring it up because you wrote once “If the world’s biosphere is to be saved/stabilized, we all need to work extremely hard and creatively to bring the world average down to around 1 metric ton/head.” Yet every one of these non-essential trips you’ve taken likely emits 1 metric ton (if not more) of CO2. Sure, many of the “commentariat” are worse but that’s one reason why journalists arent taken seriously on this issue by truck and SUV owners who often bear the blame for climate change. And now speculators (ick!) who “fuel the current steep rises in the price of basic commodities including food, oil, etc” Not frequent flyers, heavens no. They’re victims.
    My lifestyle: like you and most people in developed countries, I’m in an information industry that doesn’t demand travel. Im not sure why someone would need to interview anyone in person when through Skype eg a long distance video call is costless. Most transactions in my industry occur via the internet. I’m lucky to live ina city that doesn’t demand a car (unlike most inland US cities, eg), but my discretionary travel is usually by train. I own no electric dryer, but rack dry all my clothes. My electric bill is 100% hydropower. I eat locally grown food and recycle my waste. All in, I probably have a lower carbon footprint than most residents of the ‘developed’ world. And perhaps as Soros says, my colleagues and I are colllude in a gargantuan conspiracy to hold up the price of oil, because we want to make the world hard for the world;s SUV drivers, manufacturers, airlines, food companies, magazine editors etc.
    Sadly, thinking one is doing good is one of the most powerful sources of self-deception
    Bob, Soros excepted, speculators don’t think they’re doing good or bad. But speculators are a tiny proportion of the market and often pitted against each other –the largest are oil consumers in the developing world and the United States — . It’s funny to ritually cast blame toward wall street when we can’t even admit that our own flying habits are excessive . sadly all the hedge funds in the world aren’t powerful enough to drive oil prices higher than what Helena will pay for an airline ticket, so how are they (and not she) causing a global shortage of food?

  7. The Chicago fairy tale of the almighty “invisible hand” of the market has been superseded by behavioral economics, and recently evolutionary economics. Soros is someone who knew the game inside out (check out the “Black Wednesday” Wiki), who is still moving with the times. He’s a perceptive,eloquent and remarkably active man who became philanthropic and controversially honest when he could afford to be. Rare.
    Of course the price of oil will go up rapidly for some time yet because demand will continue to increase (until hard recession bites globally) and because at the same time oil supply is permanently dwindling.
    Of course the price of food will also continue to go up, because of (often technically unsustainable) biofuel plantations replacing food crops, as global human population and thus demand keeps increasing to a crisis point that has possibly already been reached. Most goods including food will also face increasing/inflationary costs of transport due to the oil supply/cost situation.
    In other words, more and more people globally will not be able to afford what they must have to survive.
    So the “market” in the broader sense is arguably already beginning to “efficiently” solve this problem. The same market that would no doubt consider saving the planet for more than a handful of us as “socialism gone mad.”
    Being more or less aware of this speculators naturally “invest” in the “future”, speeding things up and amplifying them a little. But look on the bright side. Guys, if you have enough credit, you can even live off understanding this, for a time at least. Maybe even buy a farm?

  8. Vadim: “Bob, Soros excepted, speculators don’t think they’re doing good or bad….”
    Actually, my larger point was that most of us want to think we are doing good, even those who would never state it publicly.
    There may be a few sociopaths who really don’t care or even some genuinely evil people (if you accept that there are such) who actively want to be bad, but in our heart of hearts most of us certainly do want to think we are doing good.
    After all, that’s why we have the cliche that the road to hell is paved with good intentions.
    The really dangerous people are those like our president who have no self doubt and also have power over others.

  9. I probably have a lower carbon footprint than most residents of the ‘developed’ world.
    Did yo did visit your loved home in Israel?
    or you invited by some group to discover The Holy Land?
    BTW, if some concerned about CO2 emissions either in developed world or in other places, just look no further howmuch CO2 emissions that wars your country started and still going on for five years, tell us about CO2 emissions for last battle in Basra how much CO2 emission will be from US/UK air support?
    I remind you if our free air we BREATH can be controlled it will be you need to pay for it, since this Holy War of CO2 started then there is tax incentives on countries, its means these taxs will be forwarded to the customer then you pay for its , i.e we pay for PURE AIR that for decades same developed world did polluted it and those Business giants made their empires.

  11. Did yo did visit your loved home in Israel? or you invited by some group to discover The Holy Land?
    Salah, take a deep breath. Israel isn’t relevant to every conversation.
    I don’t know how much energy US fighter jets use. But I’m not sure why they’re relevant in this conversation. I certainly don’t have any power to recall the US fighter jets from Iraq, any more than you as a soldier in Husseins invading army could stop Iraq from torching Kuwait’s oil fields in 1991 — the worst act of ecological terrorism in human history, responsible for countless ‘excess deaths’ by emphysema & lung cancer, poisoned groundwater, and a double digit input to the years’ warming emissions.

  12. vadim, I agree with your objections about the relevant in this conversation.
    But your insistance of CO2 problem that Helena Cobban causing with her traviles its provoking and in same time reflect that your sensitivity and concerned with CO2 emmisions, thus your sensitivity should be directied to the biggest source of the cause one of them the war in Iraq for example.
    I certainly don’t have any power to recall the US fighter jets from Iraq, any more than you as a soldier in Husseins invading army
    vadim,this misleading comparisons of your position in a democratic and developed world where there are many tools and ways available to make your voice to be heard not like me “as a soldier” in third world army where the death penalty waiting for me if I refused to go to the army service.
    the worst act of ecological terrorism in human history,
    just one thing here to say there is doubt that Iraq was the real cause of the oil wells fires!
    Those people and media who made you believe in WMD weapons and all the that crapes and causing the invasion of a UN member like what Saddam did, are the same people they reported the about Oil fires?
    Also same group made you believe of Halabjah indecent where Prof.STEPHEN PELLETIERE in NWT made it very celar its was not Iraq act.

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