George Soros | Charlie Rose | 2008 | Summary and Q&A

September 8, 2021
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George Soros | Charlie Rose | 2008

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George Soros discusses the global financial crisis and its potential political consequences. He explains that the dollar's status as the reserve currency is now in doubt due to reduced willingness to hold dollars and the increasing budget deficit. He predicts that the decline in the dollar will lead to core inflation and higher prices for goods. Soros also argues that the housing market decline will worsen, leading to an economic recession. He criticizes the false understanding of financial markets and the belief in market self-correction. He argues for government intervention to mitigate the decline in housing and regulate the financial system.

Questions & Answers

Q: What are the far-reaching political consequences of the global flight from the dollar?

The flight from the dollar raises doubts about the dollar's status as the reserve currency and leads to a breakdown in the prevailing world order. It puts pressure on the Fed to balance lowering interest rates to stimulate the economy with the declining value of the dollar, which could lead to core inflation. Additionally, holders of dollars are diversifying away from currencies, leading to an increase in sovereign wealth funds and a shift in the economic landscape.

Q: How does the decline in the dollar affect core inflation?

The decline in the dollar translates into core inflation because the appreciation of the Chinese currency and the diversification away from dollars increases the cost of goods, including those in Walmart. This can lead to higher prices for everyday goods due to inflation.

Q: What is the impact of the housing market decline?

The housing market decline will worsen and extend into 2009, leading to a recession. Housing prices are falling rapidly, with an annual rate of 25 percent in the past month alone. As prices fall, more homeowners will face negative equity, resulting in an increasing number of foreclosures. This has severe social consequences, disproportionately affecting African American communities and causing turmoil in certain areas. It also hampers economic growth and worsens the overall economic situation.

Q: Are we already in a recession?

Yes, we are already in a recession, but it is expected to get worse. The temporary rebound predicted by Bernanke for the second half of the year is unlikely to happen since things are still accelerating on the downside. The decline in the housing market will continue to impact the economy and delay any potential recovery.

Q: How can the decline in housing be addressed?

To prevent housing prices from overshooting on the downside and exacerbating the decline, action needs to be taken to minimize the number of foreclosures. This can be achieved by encouraging loan modification and renegotiating mortgage terms. While the right to foreclosure should be protected, minimizing its use is crucial to avoiding further damage to housing prices and the social fabric of communities.

Q: What is the false understanding of financial markets?

The prevailing false understanding is that markets tend towards equilibrium and that deviations from equilibrium are random. In reality, the deviations from equilibrium are not random but are the result of systemic risks and bubbles. This false understanding has led to the use of synthetic instruments and trading techniques that are built on the assumption of market self-correction. Regulators have also embraced this belief, leading to the current financial crisis.

Q: Is this the worst market crisis in 60 years?

Yes, this is the worst market crisis since World War II. The combination of the housing bubble and the super bubble of credit expansion since the end of the war has created a severe crisis. The flawed belief in market self-correction and the lack of regulation have allowed the crisis to reach this level of severity.

Q: Who made the mistakes that led to this crisis?

The mistakes were made by both the laissez-faire governments of Margaret Thatcher and Ronald Reagan and the market participants. The housing bubble started due to the low interest rates used to recover from the IT bubble. The mistaken belief in market fundamentalism, leaving markets to self-regulate, along with the globalization and liberalization of financial markets, have amplified the credit expansion and led to the current crisis.

Q: Are the measures taken by the Federal Reserve and the government enough to address the crisis?

The measures taken, such as lowering interest rates, guaranteeing loans to bail out institutions like Bear Stearns, and implementing stimulus packages, are necessary and in the right direction. However, they are not sufficient to overcome the crisis completely. More action needs to be taken to address the issue of foreclosures and modify mortgage terms. Additionally, the false paradigm of financial markets needs to be acknowledged, and regulations need to be put in place to control credit growth and prevent asset bubbles.

Q: How long will this crisis last?

This crisis is expected to last longer and be more serious than previous ones because the authorities are more constrained in their ability to address it. While the Federal Reserve and other institutions are trying to mitigate the crisis through measures like lowering interest rates, it is not enough to effectively reverse the situation. The crisis is expected to continue and worsen unless further action is taken.

Q: Where is Soros putting his money and what is he optimistic about?

Soros is trying to balance his investments to ensure he doesn't lose his capital. He holds both long and short positions. Soros is generally optimistic because he believes in the imperfection of all human constructs, including markets. He argues that finding the right balance and recognizing the need for government intervention and regulation is essential in managing economic crises and fostering stability.

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