George Soros | Charlie Rose | 1998

TL;DR

Financial markets are inherently unstable because they deal with unknowable future values that markets themselves affect, not just reflect. Soros calls this reflexivity, arguing markets tend toward boom-bust rather than equilibrium. He warns that excessive reliance on market fundamentalism, alongside IMF interventions that raised interest rates to punitive levels, worsened the crisis sweeping Asia, Russia, and Latin America.

Transcript

George Soros is a legend in the world of investment management when he moves money the markets react when he speaks the world listens he's also made an impact through a network of Foundations dedicated to global economic and political improvements he is the chairman of source fund management and the author of the crisis of global capitalism open So... Read More

Key Insights

• An open society, drawn from Karl Popper, rests on recognizing that nobody has a monopoly on truth, that all views may be wrong, and therefore requires democratic government, market economy, and critical thinking to allow flawed systems to be replaced.
• Open society is threatened not only by totalitarian regimes but also by excessive reliance on market values. Soros argues something beyond markets is needed to hold a society together, since the collapse of closed societies did not automatically create open ones.
• Reflexivity is Soros's theory that financial markets do not just reflect reality but also affect it, creating a two-way connection. Because markets deal with unknowable future values shaped by present appraisals, they can move far from equilibrium rather than toward it.
• Market fundamentalism is the excessive belief in the role of markets carried to an extreme. Soros distinguishes his open society position as a middle ground, opposed equally to market fundamentalism and to communism, socialism, or nationalism.
• The free flow of capital was the one factor present across all crisis-hit countries. It is inherently unstable and tends toward boom-bust, with the bust preceded by a tremendous boom before spreading from Asia to Russia to Latin America.
• The IMF regulatory intervention actually exacerbated the crisis by raising interest rates to punitive levels, which had a very negative effect on the economies, worsening rather than stabilizing the affected countries.
• Countries like Korea and Thailand over-borrowed with too much debt and not enough equity. Lending them more money cannot solve the problem; instead a moratorium and debt-equity reorganization is needed to spread the adjustment burden between lenders and borrowers.
• Soros calls for a New Bretton Woods designed for a world of free-flowing capital, and admits he is stronger on the analysis of how the system fails than on the specific solutions for fixing it.

Questions & Answers

Q: What is an open society according to George Soros?

An open society, a concept Soros drew from Karl Popper's Open Society and Its Enemies, is one where it is recognized that nobody has a monopoly on truth, that all views may be wrong, and that we therefore need democratic government we are ready to replace, a market economy, and critical thinking. Soros deliberately avoids a fixed definition, saying an open society has to define itself and letting people in each country define it themselves.

Q: What is Soros's theory of reflexivity in financial markets?

Reflexivity is Soros's theory that financial markets do not merely reflect reality but also affect it, creating a two-way connection. Unlike the prevailing wisdom that markets tend toward equilibrium, Soros argues financial markets deal with unknowable future values that depend on how markets appraise them at present. What markets do today impacts the economy tomorrow, so equilibrium is inappropriate and markets can move far from it.

Q: Why does Soros believe financial markets are inherently unstable?

Soros considers financial markets unstable because they deal not with known quantities but with unknowable ones, namely future values that depend on how the markets themselves appraise them in the present. This reflexive, two-way connection means markets affect the economy rather than simply reflecting it, which does not lead to equilibrium and instead tends toward boom-bust cycles. This is Soros's professional area where he feels on firm ground.

Q: What is market fundamentalism and why does Soros oppose it?

Market fundamentalism is what Soros calls the excessive belief in the role of markets carried to an extreme, which he thinks endangers society. He stresses he is not opposed to capitalism but wants to improve it and make it more viable. His open society is a middle ground, neither market fundamentalism nor communism, socialism, or nationalism, recognizing that all systems and concepts are flawed and must remain open to improvement.

Q: How did capitalism and unstable markets contribute to the 1998 economic crisis?

Soros says a variety of factors were at play, with different factors affecting different countries, but the one factor present in all of them was the free flow of capital, which is inherently unstable and tends toward boom-bust. The bust was preceded by a tremendous boom. He also argues the regulatory system, including intervention by the IMF and monetary authorities, actually exacerbated the problem rather than preserving stability.

Q: Why does Soros criticize the IMF's handling of the crisis?

Soros respects the IMF but says its interventions raised interest rates to punitive levels, which had a very negative effect on the economies. The IMF's mission is to preserve the financial system, stabilize currencies, and push countries into recession so they generate trade surpluses to pay debt. By contrast, when the crisis threatened U.S. markets, the Federal Reserve immediately lowered interest rates and conditions eased, which Soros contrasts favorably.

Q: What solution does Soros propose for the crisis?

Soros calls for reconsidering the IMF's mission and creating something like a New Bretton Woods designed for a world of free-flowing capital. He proposes injecting money when capital is unavailable so its later withdrawal signals overheating, and spreading the adjustment burden between lenders and borrowers through moratoriums and debt-equity reorganization. He admits he is stronger on the analysis than on the solution.

Q: Why does Soros say lending more money to over-borrowed countries does not work?

Soros points to countries like Korea and Thailand that over-borrowed, holding too much debt and not enough equity. Lending them more money cannot get them out of trouble; instead the relationship of equity and debt must change through a moratorium and debt-equity reorganization. He notes Korea moved in that direction a year after the crisis, and an earlier move would have abated the problem before the economy plunged into severe recession.

Summary

In this video, George Soros discusses the origin of his book, "The Crisis of Global Capitalism," and his concerns about the economic crisis. He talks about the concept of an open society and how his foundation works towards fostering open societies around the world. Soros explains his view on the dangers of excessive reliance on market values and the instability of financial markets. He shares his theory of reflexivity and how it differs from the prevailing wisdom of market equilibrium. Soros also discusses the role of capitalism and unstable markets in contributing to the global economic crisis. He suggests reevaluating the mission of the International Monetary Fund (IMF) and developing a new system for controlling market excesses. He addresses the need to dampen the flow of capital and advocates for a burden-sharing approach between lenders and borrowers in times of crisis. Soros shares his thoughts on the role of the IMF and the Federal Reserve in stabilizing economies. He discusses the current state of the global economy, potential recessions, and the future of the stock market. Finally, Soros reflects on what he wants to be remembered for and his ongoing work towards refining solutions.

Questions & Answers

Q: What is the concept of an open society?

Soros explains that the concept of an open society recognizes that nobody has a monopoly of the truth and all views are fallible. It involves having a democratic government, market economy, and critical thinking, allowing for continuous improvement and avoiding the imposition of ideologies on people by force.

Q: How did the collapse of closed societies not lead to the creation of open societies?

Soros mentions that the collapse of closed societies did not automatically lead to open societies because something was missing. He realized that open society is not only threatened by totalitarian regimes but also by an excessive reliance on market values. He acknowledges that open societies have deficiencies and need to be constantly improved.

Q: What dangers does an excessive reliance on market values pose to open societies?

Soros believes that market values should not enter into spheres of society where they don't belong. He thinks it's wrong to allow market values to overshadow human values or intrinsic values. While financial markets, particularly the financial market, are unstable, his concerns extend beyond financial instability to the potential impact on society as a whole.

Q: What made Soros conclude that capitalism had dangers and contributed to the economic crisis?

Soros clarifies that he is not opposed to capitalism, but believes it can be improved to make it more viable. He identifies the free flow of capital as a factor that contributed to the economic crisis. The inherent instability of capital flows and the boom-bust nature of financial markets played a significant role. The regulatory system in place, including the actions of the IMF and monetary authorities, exacerbated the problem.

Q: What does Soros think needs to be done to address the dangers of capitalism?

Soros suggests recognizing how the system works and reshaping the mechanisms for controlling market excesses. He believes that a new Bretton Woods framework is necessary for a world characterized by the free flow of capital. However, before achieving this, there needs to be a comprehensive understanding of the current situation and the development of a concept for the new system. Soros admits that he has a stronger ability to analyze the problem than to provide solutions.

Q: How can the flow of capital rushing towards economic opportunities be dampened?

Soros proposes the use of official guarantees to regulate the flow of capital. By providing support or injecting money when there is a lack of available capital, it can be withdrawn when the market is becoming overheated. This withdrawal of support signals to the market that it needs to correct itself. Additionally, when there is a bust, borrowers and lenders should both bear the burden of the adjustment, spreading the responsibility between them.

Q: What does Soros think should have been done in response to the economic crisis, particularly in countries with excessive debt?

Soros believes that countries with excessive debt should have undergone some debt-equity reorganization through a moratorium and imposing conditions on lenders. He cites examples like Korea and Thailand who would have benefited from such reorganization instead of receiving more loans. By changing the relationship between equity and debt, an effective solution can be achieved.

Q: What is Soros's opinion on the IMF's role in preserving the financial system?

Soros has both criticism and respect for the IMF. He understands that their primary task is to preserve the financial system by ensuring that countries meet their obligations. However, he feels that their interventions and regulatory system often have a negative effect on economies, leading to punitive interest rates and potential recessions. He believes that a balance needs to be struck between stabilizing the financial system and safeguarding the real economies.

Q: Does Soros think the global economic crisis is under control?

Soros states that the panic phase of the global economic crisis is behind us, but the after-effects are still being felt. Many countries are in recession, and the world economy could potentially slip into a broader recession. He acknowledges that the situation is still uncertain and caveats his judgment by saying it can change as events unfold.

Q: What is Soros's view on the future of the stock market?

Soros personally believes that we are currently in a bear market due to the pressure on margins and an expected decline in investments. If the market experiences a significant decline, it is more likely to lead to a recession. However, he cautions that leaving the market too early can result in missed profits as the final phases of a bull market can be highly lucrative.

Q: What does Soros want to be remembered for?

Apart from his family, Soros feels that his book, "The Crisis of Global Capitalism," is one of his most significant contributions. The book reflects the ideas he always wanted to share and have read by others. He acknowledges that refining solutions and working towards their realization is an ongoing process, and he wants to continue making contributions in that regard.

Takeaways

George Soros believes in the concept of an open society, where critical thinking, democratic government, and market economy prevail. He identifies dangers in the excessive reliance on market values and the instability of financial markets. Soros suggests reevaluating the role of institutions like the IMF and advocates for controlling market excesses through a burden-sharing approach between lenders and borrowers. The global economic crisis, although no longer in its panic phase, continues to have after-effects, particularly on real economies. Soros emphasizes the need for a comprehensive understanding of the current situation and the development of a new system. He personally believes that we are in a bear market and advises either being cautious or seeking other avenues for investment. Soros continues to refine his solutions and hopes to be remembered for his contributions to philosophy and the quest for improving society.

Summary & Key Takeaways

• Soros traces his open society framework to Karl Popper, developed while a student who lived through Nazi and Communist regimes in Hungary. He set up foundations in some 30 countries to foster open societies, but found that the collapse of closed societies did not automatically produce open ones.

• He argues open society faces danger not only from totalitarianism but from excessive reliance on market values. Financial markets are inherently unstable, and his theory of reflexivity holds that markets affect the economy they appraise, pushing systems away from equilibrium toward boom and bust.

• Addressing the crisis that swept Asia, Russia, and Latin America, Soros says the free flow of capital and mistaken IMF interventions worsened it. He calls for a New Bretton Woods and debt-equity reorganization, believing the panic phase has calmed but after-effects remain.