Soros Says Crisis Signals End of a Free-Market Model (Update2)
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By Walid el-Gabry
Feb. 23 (Bloomberg) -- Billionaire investor George Soros
said the current economic upheaval has its roots in the financial
deregulation of the 1980s and signals the end of a free-market
model that has since dominated capitalist countries.
Liberalization of the financial industry begun by the Reagan
administration has led to a series of crises forcing government
intervention, Soros told economists and bankers at a Feb. 20
private dinner at Columbia University in New York. The global
recession, triggered by the collapse of the U.S. housing market,
has “damaged the financial system itself,” he said.
Regulators are in part to blame because they “abrogated”
their responsibilities, Soros, 78, said. The philosophy of
“market fundamentalism” was now under question as financial
markets have proved to be inefficient and affected by biases
rather than driven by all the available information, he said.
“We’re in a crisis, I think, that’s really the most serious
since the 1930s and is different from all the other crises we
have experienced in our lifetime,” Soros said, adding that the
Federal Reserve had created several by lowering interest rates.
Soros, founder of New York-based hedge-fund firm Soros Fund
Management LLC, said last month at the World Economic Forum in
Davos, Switzerland, that the Obama administration’s plan to buy
toxic assets from U.S. banks won’t be enough to get financial
institutions to start lending again.
A more effective approach for restarting the economy would
be to inject capital directly into the banks and cut minimum
capital requirements, Soros said.
Subprime ‘Detonator’
The September collapse of Lehman Brothers Holdings Inc. was
the point at which the Wall Street crisis spilled into the real
economy, said Soros, whose firm oversees $21 billion.
“The economy went into freefall and is still falling and we
don’t know where the bottom will be until we get there and
there’s no sign that we are anywhere near a bottom,” he said.
The scale of the problem is more than in the Great
Depression because of the leverage involved. The ratio of debt to
gross domestic product has increased from 160 percent in the
1920s to 350 percent last year, and is set to rise to 500
percent, he said.
The real estate bubble was created as much by “relaxed”
lending standards and the valuation of collateral as the
availability of credit, he said. The bubble began in the early
1980s, and the subprime-mortgage debacle acted as the
“detonator,” Soros said. The crisis was made possible by the
globalization of financial markets and securitization of debt, he
said.
Risk management has become so “refined and sophisticated”
regulators can no longer follow what is happening, he said.
Political Contributions
Hungarian-born Soros gained fame more than 16 years ago when
he broke the Bank of England’s defense of the pound and drove the
currency from Europe’s system of linked exchange rates. Other
successful trades included bets that Germany’s mark would rise
after the collapse of the Berlin Wall and Japanese stocks would
start to tumble in 1989.
Soros gave $23.7 million to independent political committees
opposing then-President George W. Bush’s re-election in 2004,
more than any other donor, according to the Center for Responsive
Politics, a Washington-based research group. Soros and his family
donated $200,000 to the committee that organized President Barack
Obama’s inauguration last month.
Soros’s Quantum Endowment Fund returned 8 percent last year.
That compared with an average loss of 18 percent by hedge funds,
according to data compiled by Hedge Fund Research Inc. of
Chicago.
To contact the reporter on this story:
Walid el-Gabry in New York at
[email protected]
Last Updated: February 23, 2009 12:10 EST
http://www.bloomberg.com/apps/news?pid=20601014&sid=aI1pruXkjr0s
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