George Soros, billionaire and founder of Soros Fund Management, delivered a speech last week at the Institute of International Finance in Vienna discussing the financial crisis as well as the type of regulatory reform he believes is necessary.
George Soros began by saying that the global financial markets had to be put on ‘artificial life support’ after the bankruptcy of Lehman Brothers. Life support, which “consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties,” was precisely what the global economy needed in the short-term to avoid collapse. But, by flooding credit into the market to replace the credit that had disappeared, authorities effectively reinforced “the excess credit and leverage that had caused the crisis in the first place.” Now that complete disaster has been avoided, focus must turn to correcting the course by removing the excess credit in order to restore macroeconomic balance.
George Soros believes the financial crisis is nowhere near over and that we have now entered into ‘Act II’, “when financial markets started losing confidence in the credibility of sovereign debt”. This is not only evidenced by the turmoil in Greece but by other countries reducing their budget deficits “at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude”.
George Soros continues by discussing his personal theory about financial markets, first described in his 1987 book, “The Alchemy of Finance,” which he believes describes the current crisis well. His theory first asserts that financial markets “always provide a distorted view of reality” because it is impossible for markets to correctly reflect all the available information. The degree of distortion can be small or large and extremely large dislocations can lead to financial crises such as the one we face now.
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