George Soros Puts the Bite on Markets

Last Updated May 6, 2008 4:53 PM EDT

George Soros knows financial markets -- it's how he got to be a billionaire. So when he starts pointing out fundamental flaws in today's markets and calls for reform, he's doing it from within the machine.

Soros has a new book out, "The New Paradigm for Financial Markets." He was interviewed about it recently on Bloomberg TV, and the New York Review of Books printed an expanded and edited version, The Financial Crisis: An Interview with George Soros. Granted, Soros is plugging a book. But Soros is an author whose book sales mean nothing to his bank account. So when he says the world financial system is in huge trouble, and despite a recent turn-around in the Dow, things may get much worse, he isn't just being provocative.

Soros won't say quite how bad things will get, but he says that the combination of turmoil in the world's financial markets and the sub-prime mortgage crisis mean that the economy is going to get worse, not better. In fact, he says "the idea that somehow in the second half of this year the economy is going to improve I find totally unbelievable."

He says foreclosures will accelerate, both from sub-prime mortgages and conventional adjustable-rate mortgages. Worse, he says,

"There are now, for example, complex forms of investment such as credit-default swaps that make it possible for investors to bet on the possibility that companies will default on repaying loans. Such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the US government bond market. The large potential risks of such investments are not being acknowledged."

He notes that there have been "five or six" different crises in the last 30 years where governments have had to bail out over-leveraged institutions in order to save the world financial system from itself. It's obvious to him that markets are not self-correcting. He thinks leverage (not lending) needs to be limited. In the interview he also calls for more regulation of hedge funds, offers his tips on which economies look like investment winners (hint: they might not include the United States) and talks about his politics.

Just because Soros thinks market economics has become a kind of dogma, he doesn't think they should be heavily regulated, just not so loosely regulated. He says "you have to find the right kind of balance between allowing the markets to do their work, while recognizing that they are imperfect. You need authorities that keep the market under scrutiny and some degree of control. That's the message that I'm trying to get across."

  • Michael Fitzgerald

    Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.