Soros says world is witnessing end of pure, unregulated capitalism model

Posted Feb 23rd 2009 3:00PM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Politics, Recession, Financial Crisis

You might say that a key investor, one of the exemplars, is no longer bullish on the pure bulls. Or on the unregulated bulls. Or on the totally free market bulls.

Billionaire investor George Soros told Bloomberg News that the current global financial crisis originated during the deregulation of the 1980s, and signals the end of the free market model that has dominated capitalist countries, and indeed much of the developed world, since the the end of the Cold War with the break-up of the Soviet Union in 1991.

The end of market absolutism?

Speaking at a private dinner for economists and bankers at Columbia University in New York, Soros said liberalization of the financial industry started by the Reagan administration in 1981 has led to a series of crises requiring government intervention, Bloomberg News reported.

Further, Soros added that the U.S. housing sector's collapse has "damaged the financial system itself" and the philosophy of "market fundamentalism" was now in doubt because, contrary to economic conservatives' theory, markets have proved to be inefficient and affected by bias, rather by all available information, Bloomberg News reported.

Soro also reiterated that the Obama administration's plan to buy toxic assets from banks won't be enough to normalize credit flows. Two weeks ago, Soros wrote in The Wall Street Journal that a better plan, among other measures, would involve injecting capital into the banks, and cutting minimum capital requirements. (Subscription required.)

Currently, Soros is chairman of the Soros Fund Management, LLC, a hedge fund, and is also is founder of the Open Society Network, a private, grant-making foundation that focuses on democracy and human rights issues.

Soros is perhaps best known for one of the most cunning and successful short-term plays in investment fund history. In September 1992 Soros sold short more than $10 billion of the British pound, after the Bank of England failed to raise interest rates. Soros' profit on the ensuing fall in the pound: about $1.1 billion.

Market / Economic Analysis: Much to stir on from Soros. Briefly, Soros is in agreement with most economists that deregulation went to far, and that toxic asset removal by itself will not solve the financial crisis. Less convincing, at least at this juncture, concerns assessments of free markets. At present, what we can argue is that markets provide incentives and, over time, are more efficient than other economic systems, but they are not self-corrective / self-regulating and are subject to crises. Still, the above does not negate the market model, but rather argues for mixed capitalism, as opposed to pure capitalism.

During the Bush administration (but not every deregulation act started during 'Bush 43'- - some originated before), the U.S. went from 'markets represent the best model and deploy resources efficiently,' to 'markets are self-correcting' and 'markets are not subject to crises.' That shift is in large part responsible for where we are today - - experiencing the worst systemic conditions in generations. Hence, after the system has been stabilized, the regulatory reform must proceed from the following premise: that markets provide incentives, but there must be limits and safeguards to prevent excessive risk, incompetence, fraud, and greed from jeopardizing the flow of credit.

Tags: Asia, banking sector, banks, bond market, credit markets, Europe, gdp, George Soros, inthenews, Soros, toxic assets, U.S. economy

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Reader Comments (Page 1 of 1)

2-23-2009 @ 4:57PM

Carney said...

Nonsense on stilts. Government interference and regulation were prime contributors to this mess.

Particularly the enormous pressure from Bush and the Democrats on lenders to give out loans to high risk borrowers at favorable terms (no down payment, low interest rates).

The terms all but guaranteed that loans to these high-default demographic groups would be unprofitable eventually, but Fannie Mae and Freddie Mac bundled them up and sold them on Wall Street with an implicit taxpayer backing.

And sure enough when the time bomb finally went off, taxpayers and investors alike have been left holding the bag.

So what to the tax-eaters and government pushers do? Blame themselves? End affirmative action lending? Ignore the "anti redlining" groups?

Of course not. This is an unprecedented opportunity to seize more power and money from free people and hoard it for the political class, and the politicians and bureaucrats are slavering at the opportunity.

Our community activist in chief is leading the charge.

2-23-2009 @ 5:13PM

blogs11111 said...

Carney you just proved Soro's point. If these banks had been regulated they wouldn't have been able to lend money to people who couldn't afford the mortgage. Also, with regulation and limits/caps, credit card companies wouldn't be allowed to raise rates at will.

2-23-2009 @ 7:15PM

william lindblad said...

I hate to tell all three of you - you are all wrong.

The last time we had totally unregulated business activity was way back in the time of Jay Gould. Regulation has been around in some form or another since the 1880's and keep in mind - regulation does not have to be government! J.P. Morgan regulated a banking crisis in 1909. J.P. was a private but highly respected member of the banking community. That's putting it nice. In fact, the rest of the bankers were scared s--t of him, and when he locked them in a room, they got the message to agree on a plan of action. Hey, why do you think that we have the Fed? Check when it was created. Sub prime has been regulated since the 1930's.
There is one obvious factor in all of the present mess. Regulation does not work IF it has roadblocks. We had near as much around in the 1980's and had it worked than there would have been no RTC.
It is nice to see that Soros woke up, but where was he two years ago. Check back and you will find that dear George thought nothing radically wrong. Hindsight is ALWAYS perfect.
David Farber just did this House of Cards which is an excellent analysis but he missed or overlooked the key. The questions of who,why & how are not fully answered.

2-23-2009 @ 7:25PM

Tim said...

Soros made fits full of cash in the mean time. I find it utterly amusing how folks like Soros blame deregulation and a particular party or administration for the current mess. If he or they were so civic and socially minded and saw the doom, they should have spoken up or self-policed during the past 20 odd years. I guess when you are making dumpster trucks worth of cash, it's easy to ignore. I don't ever recall his hedge fund calling for regulation of hedge funds. Hedge funds were deep in the center of the current economic crisis, by driving up derivative prices to unevaluated levels, bubbling commodity prices, and shorting to run on companies to little to no value during the current economic downturn.

@Carney, I think you need to do a bit more research and will find that the big push started in 1991 with the whole push for affordable housing for everyone. Of course, the following administration and Congresses helped this policy along.