Bill Moyers talks with George Soros...

[Bill Moyers Journal, October 10, 2008]

"You are not alone if you are worried about the financial melt down. So is my guest George Soros, one of the world's best known and successful investors, making billions in times of boom or bust. He's been warning for years of a financial melt down fueled by easy credit and sleepy regulation. Now he's out with this timely book, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means."

BILL MOYERS: It's good to see you.

GEORGE SOROS: Same here.

BILL MOYERS: Let's imagine for a moment that we're not in a New York studio but we are in Neely's Barbecue Stand in Marshall, Texas, my hometown, and we're surrounded by people I know, people who have lost half of their 401(k)s in the last three or four weeks, and what they want to know is does this financial meltdown represent the end of the American dream as they have known it.

GEORGE SOROS: No. No. I think it's got nothing to do with the American dream as such. There has been some kind of an ideological excess; namely, market fundamentalism for the last 25 or so years. And now that world is collapsing...

BILL MOYERS:What do you mean "market fundamentalism"?

GEORGE SOROS: It's that markets will correct themselves, that you should leave it to the markets, and there is no need for government intervention in financial affairs. Letting markets run rampant. And that doesn't work. Markets have the ability to adjust and they're very flexible. There is this invisible hand. But it is also prone to be mistaken. In other words, markets instead are reflecting reality. They always look at reality with a bias. There is always a prevailing bias. I'll call it, you know, optimism/pessimism. And sometimes those moods actually can reinforce themselves so that there are these initially self-reinforcing but eventually unsustainable and self-defeating boom/bust sequences or bubbles. And this is what has happened now.This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive.

BILL MOYERS: You used the word "disaster."

GEORGE SOROS: The financial system is teetering on the edge of disaster. Hopefully, it will not go over the brink because it very rarely does. It only did in the 1930s. Since then, whenever you had a financial crisis, you were able to resolve it. This is the most serious one since the 1930s, there hasn't been one as serious as this.
Unfortunately, the authorities are behind the curve. They are reacting to these crises as they emerge. One thing leads to another, one market after another gets into difficulty. And they react to it. And they don't quite understand what's hitting them. So they are not anticipating and not gaining control of the situation.

BILL MOYERS: This is what's interesting, why wouldn't the government be able to look at what you looked at and see what's coming?

GEORGE SOROS: Because actually they have been working on false premises. This sounds very strange, but there's been this development of, this belief of market fundamentalism. And particularly the idea that markets always revert to the mean and deviations from the mean occur in a random fashion. And you can calculate it. And you will get a nice distribution and you can anticipate it. And based on that, you can manage your risk. And that actually was based on a false idea. This namely, the markets self-correcting because the market moods have a way of affecting the fundamentals the markets are supposed to reflect. And there's always a divergence between our perception and what actually exists.

For instance, take the simplest situation, namely housing. Banks give you credit based on the value of the houses. But they don't seem to somehow understand that the value of the houses can be affected by the amount of credit they are willing to give. Now, we've developed these fabulous new ways of securitizing mortgages, which has made credit much more amply available. And we've been able to calculate risk. And, therefore, we were willing to give more and more credit. And that has pushed up the value of the houses. Also, of course Greenspan kept interest rates too low, too long. And so you had very low interest rates, easy credit, and house prices have been appreciating at more than ten percent a year for a number of years. And the willingness to lend actually increased. There was an insatiable appetite for these new fangled securities ..."