George Soros Lecture Series: Financial Markets Q&A

i hope we may be able to elaborate a little bit more on this inet initiative during the question and answer session if any of you would like to uh ask some questions about it but i wanted to reflect in the uh seven or eight minutes that i've been given on uh georgia's broader ideas listening to george today i was reminded of when we first met it was in 1983 during the first of the bubbles he mentioned the third world debt crisis and was actually at the annual meeting of the world bank and imf i was then a young journalist working for the financial times and i just ran into him by accident we were talking about what it was that the imf was doing wrong in mexico and brazil at that time but for me his ideas were really a revelation perhaps because i was so young at the time uh and we became friends and i followed the development of george's ideas closely enough to feel that i really understood them so that when he published what i still think was his most important book the alchemy of finance i felt like an initiate into a secret religious sect not because i worshiped george or these his ideas far from it but because i was told at that time by almost everybody i met the george's philosophy was totally incomprehensible the reason people bought that first book was because they thought they would pick up some investment tips yet i felt to me these concepts that he first described fully in that book of the and that he mentioned today of reflexivity fallibility and human uh uncertainty and particularly the relationship between those three concepts to me those concepts seemed absolutely clear and revelatory others as i said differed and only bought the books for investment tips but even though george was told initially that his ideas were incomprehensible he continued to explain them with the combination of persistence self-confidence and self-criticism which has made him so successful also as an investor and the interesting thing now is that when he talks about reflexivity as i think he probably did most articulately in this lecture now everybody in the markets claims to understand reflexivity perfectly in fact if they couldn't understand it they would not be able to continue in their jobs in the markets and even in the policy making world among central bankers he mentioned murder king and finance ministers the idea that the world goes through reflexive boom bus cycles between finance and policy is now pretty much accepted as the conventional wisdom it's really only among academic economists that this idea is not recognized and perhaps although only perhaps as george said uh the development of inet will uh lead to its further uh it's its further development but as reflexivity has now become such common ground among economists and policy makers all over the world i want to put on if you like my perverse my challenging hat and actually disagree and challenge some of the ideas that george put forward today briefly the boom bus sequences as george said in his lecture can be interrupted by government intervention or other exogenous forces and the question i want to raise is whether it's possible that the world does in fact tend to equilibrium despite what we've just heard provided the periods are long enough and not solely through the operation of markets but through the operation of markets interacting with government if we take the role of government into account is it possible that the world does actually tend to equilibrium or be it going through fairly large cycles in a way this actually relates to a theory that george first discussed during that third world debt crisis which he called the brink theory the idea that events push uh crises to the brink of complete chaos but not quite over the brink and this is of course a concept that's also been developed in the mathematical theory of complexity and chaos where the world is always or complex systems are always said to be operating just on the edge of chaos maybe the super bubble of finance and regulation he he's discussed and indeed the even bigger super bubble of market fundamentalism and if you like keynesian social democratic politics is not after all a bubble but in a sense a process of evolution and maybe there is an equilibrating mechanism ah what george called the brink theory and what might be called the mechanisms of policy politics and democracy in other words maybe there is an equilibrium rating mechanism within politics which prevents these boom bust cycles in in market fundamentalism in economics going too far george described how all bubbles are created by a trend and a misconception and it's absolutely clear that the misconception not of just the last two or three years but really of the last 20 years was as he said that markets could totally replace politics in ordering human society but maybe that misconception is now going to be corrected leading to the emergence if you like of a new form of capitalism and i think the key to this new form of capitalism is that if it emerges will in fact go back to georgia's three concepts of reflexivity fallibility and human uncertainty in my view we are perhaps moving into a fourth phase of capitalism if you like the first phase 19th century capitalism was when politics and economics were believed to be totally distinct and both were believed to be evolving in a generally constructive direction by the conventional wisdom or were believed to be both doomed to failure if you're a marxist both economics and politics would were believed to be either constructive or doomed to failure in the 1930s that perception changed and from 1930s to the 70s we went through a phase when there was a widespread belief that markets were always prone to failure and social justice but governments were always knowledgeable and just and in other words the market was always wrong the government was always right in the 70s there was another revolution and from 1979 with the election margaret thatcher in 1980 onwards we went through a third stage in which the prevailing belief if you like the prevailing misconception was that markets were always efficient and rational while governments were always wrong now it seems to me as a result of last year's crisis we could be moving into a fourth stage where it is recognized that both markets and governments are fallible not always fallible but frequently fallible now the last point i'd like to make is a more positive one which is that the recognition of fallibility sounds paralyzing but actually it can be empowering fallibility and the recognition the explicit recognition of human uncertainty as george describes creates space for change innovation creativity imagination and leadership and it forces empiricism self-analysis and internal self-correction and in my view nobody has symbolized such creative con such creative tension between fallibility and confident self-knowledge both in his business and his philosophical ideas as george soros thank you very much if i may briefly uh respond before we while people at the mit prepare their questions you may be right and and certainly if we take that step forward and recognize that both markets and governments are fallible liable to make mistakes and therefore willing to correct their mistakes we are more likely to actually develop a system which does not end in the financial crisis however if we make that assumption uh that we have reached such a system surely there are the seeds of the next financial crisis so you have to assume that you will not be able to do it in order to achieve it and as you know we've actually really extended the the financial cycle by several decades through intervention uh so to that extent the interventions were really very successful however however then they've made the bubble when it's the super bubble um that much greater uh and the and the the the great crisis of two crash of 2008 was preceded by the great moderation when you know risk uh assessments were at a minimum so that's the contradiction and that's the the kind of awareness of reality that we need in order to maintain balance i would agree with you that the the system can only continue if there is a systemic change not just a marginal change if there is a systemic change and not just in finance but in the whole relationship of markets and government now whether that happens or not as you say very much remains to be seen the juries aren't and in fact perhaps the evidence is becoming less favorable to that point of view but actually i really will address exactly that question in my last lecture uh shall we now go to mit uh where uh we'll take the first set of questions and then we'll move to the audience here in budapest uh do we have uh a question uh to start with from mit yes we have three questions prepared good afternoon mr soros mr kalecia and ceo participants first question yes we can hear could you talk a bit a bit more slowly because uh then we'll hear more clearly very good can you hear me can you hear me okay i guess you can uh yes my name is uh mark clara i'm an alumnus of mit do we have we can't hear you have we have we lost the sound we have lost the sound pressure mic again there we go will um my name is mark lehrer i'm an alumnus of uh mit and a professor of management at suffolk university in boston i'd like to thank mr soros for a blast of fresh air and unorthodox thinking i have a question about the role of private incentives and compensation incentives of top managers as a possible source of distortion i'm wondering whether that's a major or a minor factor in such crises and whether mr swords has some recommendations about how to regulate the compensation and incentives of top managers well i mentioned that institutions that are too big to fail have to submit to a government regulation of salaries and there is at the moment some serious i would say social injustice in the very large bonuses that people in those institutions earn because the earnings currently are due to a hidden subsidy that the banks are receiving by keeping interest rates at zero and allowing them to invest for instance in government bonds ten year bonds yielding three and a half percent that's three and a half percent free and clear hidden subsidy this is the route that we have chosen following the the japanese example to allow the banks to earn their way out of a hole and i think for the employees of the banks to then get an extra bonus on that money actually is socially unacceptable another question from mit hello my name is amitai kalmar i'm a sloan mba student and i want to thank you first for having this talk with us and can you please share your views on the comments made yesterday by professor roubini about the status of the us dollar carry trades and the consequences which may arise when these positions will unfold and do you think we're experiencing a new bubble evolving thank you i didn't actually read those those comments so i don't know what you are uh referring to but uh certainly there are currently uh imbalances in the financial system due to the quantitative easing and the availability of free financing so that is actually for the moment to the extent that the stimulus is applied in the united states which really would need to reduce its current account deficit the stimulus is applied in the wrong place and is building up the imbalances which were partially responsible for the crisis in what sense do you mean it's being applied in the wrong place the stimulus well because to to balance the world economy the the united states has been consuming significantly more six and a half percent more at the end uh than it was producing uh and that built up the the um surpluses in the uh in the other countries that uh and which were then invested in u.s government bonds and that was uh sort of at the root of the great moderation that preceded the stone that's what i meant so you're saying the stimulus it would be better if more stimulus were applied in other countries in the in the exporting countries in the in the surplus countries yes and then particularly in the developing world and as you know i'm advocating the the use of the special drawing rights uh for the developing world but that would take us too far at here do we have another question from mit hi my name is fernando duarte and i am a phd candidate at mit and my question is in terms of predictability of returns what are the different implications between the efficient markets hypothesis and reflexivity in terms of the predictability of the crisis and of the cycle uh where were the where were the specific different points between an efficient market analysis and the reflexivity analysis which in a sense would allow you to see you know which analysis was empirically better well you know i'm not qualified to to criticize the efficient market hypothesis and the rational expectations theory directly because i'm not familiar with it the fact that i was making able to make a living for last 50 years without being familiar with it is a comment on the value of that of those habits however i i can tell you that my interpretation of bubbles expressly does not claim to be able to tell whether a test will be successful or not and from personal experience i thought the super bubble was big enough in 98 that it would lead to a collapse of the financial system and i was wrong so i do not claim to be able to predict the future and i expressly claim the opposite however i think that with that theory it is possible to anticipate events to create scenarios and hypotheses that you can then test against the actual course of events and that is in fact what i have been doing for the last 50 years as a market participants as participant whenever i could i formulated a hypothesis with regard to a particular stock or the market or an industry and then i tested it against events and when events evolved differently i reassessed it so i think this and this is a very poparian approach and that's why i'm a great adminer of of papa's uh uh theory of scientific method uh even though it doesn't apply the way he he wants it to uh to social phenomena because of this reliance on conjectures and refutations uh and it's been a very very rewarding process as far as i'm concerned well well let me press you a little bit further on that uh to give a specific example if we look at this latest crisis and i think this was really the question that was being asked if we look at this latest crisis uh could you describe for us at what point you began to uh develop if you like these hypoth a hypothesis suggesting to you that we may be moving into into a climax of a major bubble or perhaps even the super bubble and you know what were some of the events that led you either to confirm or draw back from that hypothesis that we may be that was clear to me obviously for many years and and i in in my previous book in 2006 i spelt it out and i identified actually uh the the sub trump and the housing uh market as the locus from which the the crisis would come so that was and i was not the only one who did that so it was visible but when it would come it was could not be determined and frankly i and many others who expected it to happen expected it to happen at least a year earlier then it really started to hit uh in the early part of of a 2017 and in august to and i i wrote about it uh then and published it that was the new paradigm which i wrote actually at christmas 2006 um published in in april and then in august i saw that this the crisis has really arrived and i came out of retirement and took over the management of my fund uh in order to protect my my estate um which i did in in august so from august uh 2007 it was pretty clear to you that this was going to be a major the major uh financial crisis not just another minor bubble of the kind that we've seen over the last 20 years yes but for for the order of uh uh uh being being truthful i did not anticipate that lehman brothers would be allowed to fail i i saw the crisis as being the turning point but i did not anticipate that the authorities would fail to rescue lehman brothers and i think that was a game-changing event do you think i'm sorry to take the time of our friends at mit but on that point of lehman brothers do you think the authorities had any real alternative i i think they did although they would say that they did not have the powers of resolution to intervene but in actual fact whenever there is a crisis and the authorities recognize that recognize it as such they took measures or in historically which could not be justified by the then prevailing rules so they always use a large degree of discretion and they could have done it had they been determined to do so another question from mit this is ricardo caballero head of the economics department at mit good afternoon mr solos um you mentioned the need to control credit in order to regulate acid bubbles and you mentioned the example of china um but the big difference between china and the u.s is the type of financial markets they have and we have in china it's mostly bank media is mostly bank mediated the same is true in continental europe but in the u.s banks play a very small role so what do you do in a more complex financial market like the u.s in order to control credit when asset bubble is developing i i i'm sorry professor caballero the the sound transmission was not very clear i think i understood the question but uh come back if i've misinterpreted uh i think the question was that uh you mentioned that there's going to be a need to control credit as well as use monetary policy to regulate bubbles and you gave china as an example of the successful control of credit i think the question was that in china it's possible to control credit because they have a dominant banking system and almost no credit markets and indeed the banking system is largely state controlled if you if you have a system like the us which is largely a credit market securitized system is there any feasible way of actually exercising control over credit yeah i think that was the question yes i think there is and in fact that control was being exercised as i've mentioned in my lecture when i started in business banking system was extremely closely controlled and i've actually witnessed and participated in the gradual decontrol of the finance of the banking system in 1972 i wrote a a paper entitled the case for for growth banks because i said that an industry that was totally dormant and the people working in it were not motivated by profit motive but were more like more like government employees there was a new group of banks actually very much under the leadership of walter riston of a citibank and they fanned out from citibank and and they actually wanted to do banking for profit and and i said this could be very rewarding for investment and in fact it was and then in 73 it came the the oil crisis and the large surpluses that the oil producing countries received which were then re-channeled through the commercial banks and that's when the london market at the euro dollar market suddenly came to life and gradually the very strict controls on state banking were were overcome by setting up a london subsidiary that was exempt and that then eventually led to the financial crisis of 82 and so on so it it is a historic process and i actually have lived through the entire history but is it possible now that the genie has been let out of the bottle now that you have a credit market system as opposed or a capital market system of credit rather than a banking system of credit in the u.s can you control credit when it's supplied by the capital markets well obviously you can't control it as if if it were within the banking system and actually what happened was in 1982 as you recall because that's when we first started discussing these issues the banks were forced by the central banks to renew roll over the credits in order to prevent a collapse and they didn't like it and that's actually when they started securitizing their loans so that they couldn't be caught by the central banks in case of need and then in 97 most of the sovereign bonds had been securitized and therefore actually accept in the case of korea south korea uh the the banks could not be uh forced to roll over the loans and that's why the brunt of the burden was carried by the countries concerned so it is more difficult if you don't have it in the banking system but i think that the measures that i proposed and i think they need to be further elaborated and and and refined uh could actually give you that kind of the control that you that you need should we have one more question from mit and then we'll go to the floor here and why don't we maybe unless there's somebody dying at mit we'll have some questions i think there's someone about to ask okay all right okay last question good afternoon mr soros i have a question uh i'm a second year student at mit sloan and i want to carry on a point about china it's on graduates i'm a second year sloan student to carry on with the point of china it is able to control capital inflows due to its dominant economic position in the world how about a middle developing country how does it do likewise one example i think of is malaysia which closed up its its capital inflow borders after the 1998 crisis how does a developing country like that stand withstand international capital inflows uh i think the the question is again uh apologies but it didn't come through very clearly but uh i think the question was about capital controls and the the disruptive inflows and outflows of capital uh china has capital controls even despite the fact that it's an overwhelming now an overwhelmingly powerful economy uh i think the question was how can other developing countries other emerging economies uh which are smaller and potentially more vulnerable how should they cope with the problem or the threat of disruptive capital flows well it is much easier to control capital flows when they are coming in than it is when they're going out and you can see that brazil just imposed a two percent tax on all new financial capital coming into brazil in order to slow down the inflow now that's a bit cruder than the most sophisticated method that chile applies which apportions the the the tax to the length of time that the capital is is committed but and probably it will not uh slow it will slow the inflow but probably will not uh uh stop it uh but clearly there is a greater role for capital controls than the washington consensus recognized prior to the crisis now china has actually discovered a fabulous machine for mobilizing the creative and and acquisitive energies of the people and and yet creaming off a significant portion of their productivity for the benefit of the state by tying the remember to the dollar and and effectively ensuring that the remember is undervalued so that china has built up the amount of money that has been creamed off without people feeling any pain can be measured it's 2.3 trillion dollars and still growing good answer shall we have some questions here maybe we'll come back to them we may come back uh if there's time uh there's a question there in the middle let's start with that um hi yes um my name is zoltan gluck i studied philosophy at bard and now i'm at the sociology department here at cu um i have two related questions i'll try and make them brief um about the nature of capitalism um one of them is about economic theory and the other one could i could say about philanthropic practice um it seems that what you're proposing here is a uh a theory of crisis of sorts of financial capital and i wanted to ask about um a broader field of economic theory crisis theory more generally and related to a point brought up by joseph stiglitz in his lecture last week at cu namely that the post-war period we saw a 15 years of relative stability where there were no crises of capitalism and that was a bit of an anomaly within the history of capitalism i was wondering how your theory would apply more broadly historically to say the early capitalist crises of the 19th century and secondly just don't go second because i missed the key key words so i couldn't understand the question uh the the question is uh you have a theory of crises of capitalism of financial crises uh can you relate it not just to the crisis of the last 20 or 30 years uh but going further back in into history into the history of 19th century of capitalism does your theory in some sense still apply yeah yes the the big difference that in the 19th century ever since you've had financial markets you have had financial crises uh in fact even when you only had two lead markers you had financial crisis but but each time there was a crisis there was an attempt to understand what went wrong and to bring some regulatory reform and as i read the history of the 19th century there were all kinds of commissions in england examining after each financial crisis what went wrong and a step further was taken to build up a central banking and in the 20th century after the after 1929 you started with the regulation of stock markets so crises were followed by reforms whereas starting in 1980 because of predominance of market fundamentalism crises were followed by deregulation partly actually for very practical reasons because in 90 after 1982 the banks also had to earn their way out of the hole and it took them about three to five years to do it before eventually uh the emerging market that was reorganized into brady bonds so there was a practical reason for doing it but there was also this this um let's say ideological reason and don't forget that glass-steagall was abolished only a few years ago and and and uh short selling on the stock exchange was the was abolished only just in time uh for bearings yes there was a question the second question all right briefly the second question very very brief um yeah uh it's it's it's related um and perhaps could be related also to this new economic institute you're talking about so about philanthropic philanthropic practice whether philanthropy in your opinion changes the nature of capitalism that is to say some critics have said that philanthropy sometimes acts as a band-aid as what you've said is a fundamentally broken system and i was wondering what you see the role of philanthropy as whether or not it can affect a deep structural change within capitalism or whether you see it as some type of a transition to a different type of systemic solution to some of the problems we've been experiencing yes i i do think and i will deal with that issue uh uh particularly in in the in the last lecture where i deal with the international aspects because the system was supposed to to uh to be a sort of a level playing field but of but in fact the playing at the playing field was not level and and the the center particularly the united states was more equal than others uh and and that brought about certain imbalances which were very much an element in the super bubble which i didn't have time today to deal with but i will deal with it in my fifth and my last lecture let a question there and then one there and then no no no we'll have this one and then my name is peter i am from the economics department of the cu and in light of your last words might be my question is a little bit premature uh because you uh promised what to speak uh later on uh but i saw an interesting contrast between your lecture and the the subjects and the questions of the aft of the discussion after that people were asking you about china and malaysia and other things so the international aspect uh can we formulate a problem in uh in in this language because what you presented was basically as a crisis uh recurring according to the rules of the international financial markets according to the rule of the american markets but maybe actually and in in the last uh event it is certainly the case that uh the the bubble was created by real differences on the globe uh the difference where china is relatively united states difference where india is relative the united states so it's not a rule problem it's it's a complexity of the world it's globalization where countries having really different situations uh play the game on the international context and because of the communication these things go very very fast don't you think that these are probably as important element of the story the real differences and just uh a quick reference to to the consequences i think it was two days ago where uh krugman in new york times was talking about the chinese currency problem very much in the context as you do and then he said china was stealing jobs from elsewhere now this is real thing this is not speculation and we cannot blame i think from here or from anywhere else that the chinese government is pursuing such a policy it's not speculation it's not stupidity it's their interest yes there is obviously an international aspect to it but let's face it this particular crisis in 2007 2008 it originated at the center you see and therefore for this particular phase of the crisis that issue is not central that's why i didn't deal with it today i will deal with it uh the fifth uh lecture but it's it is a very definitely and i think that the international system has to be rebuilt uh i will i i don't want to go into my fifth lecture now so bear with me until then no there's a question over there now there's a forest of hands going up lots of people want to ask questions so can we keep the questions brief question and i would like to ask don't you think that regulators will be forced to ease regulations at times of growth and this is just a part of a natural cycle that regulations happen after such a crisis and then as a market grow regulators are forced by political political pressure to ease our market regulations that contribute later to the question is that uh once the crisis subsides actually regulators will be forced to ease regulation by political pressures uh so even if there is a slight increase in regulation in the immediate response to the crisis and easing in the long run is likely well there already is a desire to uh forget about regulations because the the the the institutions that survived actually their uh market position has been greatly strengthened and and therefore they have certainly tried to protect it with all they have got and they've got plenty so uh you will have a serious issue and i just hope that we will not forget about the reforms that are needed because uh i i think that the system has been very seriously weakened and if you you put humpty dumpty together again it will not last uh question over there and maybe another one thank you good afternoon writer so it's also phd candidate myself actually slow down it's hard to understand so thomson reuters and phd candidate bernabeus edge my question would relate mainly to the last question of mit emerging markets and bubbles are you not concerned that actually a new bubble is formulating in the emerging markets let's say with the words of yours fueled by the positive feedbacks of the increasing commodity prices the belief that these countries has a greater potential and the carry trade operations yeah thank you the question was about emerging markets don't you think that a new bubble is cr is coming along in emerging markets fueled by misconceptions like commodity prices will go up forever these countries have far better prospects you know the the rise of china and so on i don't think that everything is a bubble and i do think that that this financial crisis which originated at the center has hurt the center much more than than the periphery and and uh i i do expect the emerging markets to do significantly better than than in the united states economy there was a question there good afternoon peter grimberg do you think their scope for applying some aspects of sharia law or ethical banking uh particularly with reference to provision of credit and debt finance sharia law sharia banking islamic banking yes i i don't know much about it i'm sorry or ethical banking is is there an ethical dimension to banking that that could be somehow brought back would that be a way of controlling the banks by telling them to be more virtuous look i'm a great promoter of ethical values but i don't see the application in this in this context and i the impression that i have but i really don't take this as a syria well considered opinion that the islamic banking kind of reconciles the islamic rules with banking through substitutes they're using some other techniques to find a compromise there's a couple of questions here in the middle and then one there thank you um i'm lazila velosi from citibank and amcham so i'm one of those hated bankers um i just wanted to ask how why is it in your opinion dr shawsh that so little analysis is being done about the culpability of interventions like the fannie mae and freddie mac to enable some of these things to to proceed this is probably the only time when the people who didn't pay back the money are the good guys and the ones that didn't get it back are the bad guys and uh i might be biased obviously in that yeah the question is and the gentleman works for citibank so that's taking that into account uh the question is uh why has so little analysis been done of the culpability of government intervention in in creating this crisis and the main example being fannie mae and freddie mac you know they were supported by the government uh they encouraged lending to subprime borrowers and so on and this is the first crisis in which the people who didn't pay back the debt don't seem to bear any moral responsibility well actually i certainly am on record blaming the regulators for failing to regulate i mean that was perhaps the the major failure that doesn't exempt the banks but it certainly uh uh uh regulators were as much at fault in in uh uh failing to perform their duties as the banks were in in exceeding their uh mandate but if if i could i i i'd like to press you a bit on this because actually this is a point of view that's presented a lot in the wall street journal by the republican party in the u.s that actually this whole crisis was caused by the fact that markets were not free enough it was the fact that governments intervened in markets subsidized uh home loans to uh you know poor households who wouldn't couldn't repay that actually caused the crisis what's your reaction to that argument i think it's it's very simple if you didn't have regulations you pro you wouldn't have sophisticated financial markets because they would have collapsed long ago i mean they didn't collapse in 98 when there was plenty of reason for it to go to collapse because the regulators intervened successfully so to to to argue that if you had no regulations uh you would have no crises i would say you also would have no financial markets okay good afternoon mr shurosh i'm stuart durham managing director of the ceu business school and i'd like to pick up on the issue which you raised of hidden subsidies in banks reported in the times yesterday i think no surprise there you make the point that the banks are currently taking advantage of a window of opportunity able to earn their way out of a hole by borrowing very cheaply and investing in government bonds at three three and a half percent or something what has made this possible was to a large extent the implementation of the quantitative easing programs and at least the way it was presented to me was that these programs were introduced in order to make government bonds less attractive to banks and to promote the spread of credit into the economy is qe a failure or do we need to try harder oh the question is well not sure it's whether when quantitative easing is a failure or is it responsible for these this hidden subsidy no no but the question is the question was that the the reason for this subsidy to banks is that there's been all this quantitative easing keeping short rates at zero of course that's given the subsidy to banks does that mean the quantitative easing was actually a mistake no no i i think that that it was absolutely necessary uh to prevent a collapse so the authorities did the right thing with quantitative easing in my opinion the mistake they made was not to recapitalize banks on a compulsory basis but to inject these hidden subsidies to allow them to earn their way out of the hole the the injection should have been at the level of the capital not at the level of the balance sheet and uh the 700 billion of tarp money the originally voted would have been in my opinion enough to underwrite the recapitalization of of the banks in other words the scandinavian approach would have been more effective than the japanese's approach because we've basically gone the japanese route and as you know after 18 years japan is still not out of the woods but even if you did it did recapitalize them if you give the banks money at zero percent interest what is to stop them why shouldn't they invest it in government bots at three and a half percent and make these large profits aren't you inevitably providing them with a subsidy well and and and if the banks didn't uh uh invested three and a half percent interest rates would not be three and a half percent but much higher so uh that's a that's part of the mechanism of quantitative easing basically uh the the point is that if you recapitalize the banks if you separate separated the old bank from the new bank and injected capital into a new bank and allowed the old bank to run off its portfolio there would have been new banks which are flush with deposits and capital looking for a suitable investment opportunity or lending and therefore lending to the private sector much more ready to lend and to take risks thank you charles kovacs ex-banker in any case while we're on the subject of the interest rates i just like to note that the zero percent interest rate is not necessarily charged by the government for the money given to the banks but that is the short-term interest rate effectively paid to consumers in the united states and that means that the demand deposits of the banks have become very cheap this goes a long way forward it's a lot more than just the monies that the government has have invested um on the other hand uh don't you think that the lower interest rates which affect the entire economy are also driven by the general recession which seems to be taking place in in the states it's not necessarily just bank driven yeah obviously the fact that there is no private demand uh keeps interest rates lower than they would than it would would be otherwise there's no question could i ask you do you believe that that the bond market is in potentially a bubble you know you should say we must look for bubbles everywhere but do you think that bond long-term bond bonds at three and a half percent given what's happening with the fiscal deficits all over the world that that this is also as dangerously unsustainable situation i think that that right now you're still in a deflationary environment although the economy is recovering and and as soon as it starts recovering uh um and you can you and the if the authorities don't manage it extremely skillfully uh the financial markets are going to get nervous about the prospect of the inflation and that would then push up interest rates and choke off the recovery and that in a way is reminiscent of what happened in the 70s where you had stop go and i think we we will be in a period of prolonged uh stagflation if you like or or or or fears of stuff yeah uh but i think the the the the financial markets themselves will prevent inflation from getting out of hand there's a lady direct back hello my name is lila strika i'm a registered auditor and business advisor my question is about a book that was published in early 2009 by harry dent this is a an economist who was successful in predicting the major bubbles and crises that you were talking about and in this book he says that apart from quoting you that this is the end of an era it describes quite a gloomy picture of the next few years even decade he says that the next great depression will be from 2008 to lasting to 2023 with the worst part starting late 2009 making the dow jones falling to 3 800 points which will not recover until 2017. so would you like to reflect on this thank you yes i don't know who it is and haven't heard the name but i can disagree with it because on principle because i don't think that the future is predictable the way he's predicting it i mean my whole theory is that that financial markets evolve in a historic process and history is essentially unpredictable because it will depend on decisions that have not yet been taken so how can they be predicted yes the lady over there my name is christina and i teach finance at ceo business school uh mr schwarz my question is you mentioned the conglomerate mergers in the 1960s as a contributor to the bubba my question is whether the recent the recent the merger wave that started in the 1980s with the strategic mergers of large companies has been contributing uh to the financial crisis on a longer term level by creating large players in the market for which lenders like to lend to thank you you said that in the 1960s the conglomerate boom the merchant mania created a bubble do you think a similar a second round of merger mania from the 1980s onwards which created bigger and bigger companies uh which wanted to deal with bigger and bigger lenders was also a a contributor to this latest bubble a minor contributor i would i would say that it was not a central element in in in the super bubble it there was this and and obviously uh the concentration of the financial system is much more disturbing in that respect than cons the concentration in the the normal industry except i would say the media but that's a different story because oh tell us about the media no no it has to do with it it has to do with democracy uh we're we just we want to see if other one or two more questions from mit okay i other can we communicate with mit tell them we will come back to them uh we'll come back uh we've we've got about five minutes left so maybe there's time for one or two questions from mit after we've had another question from here yes sir uh in middle there just a moment with microphone ms wolfgang litke i'm not a financial expert i'm just a doctor and a taxpayer and my question is has anything what we have heard today to do with the taxpayer the bailout has definitely something to do with the taxpayer and is there a danger that at some point the taxpayers don't want to support this virtual system on top of them yes obviously the taxpayers are an important player players in this in this and they are politically uh objecting to the higher taxes uh that are implicit in the run-up of the of the uh national debt but you have to bear in mind that there would be an alternative cost if you did not stimulate the economy because and and you you really have to look at the national debt as a percentage of the gross national product so if the gross national product falls you can be in that trap that would be much worse than than than the stimulus so it's it's something it's a question of the lesser evil that you have to consider right do we have a question from mit no i i i think i think we we can't we can't get through to that uh one more question then from the floor here jay fogelman from the uh ceu business school faculty mr schwartz to pursue an earlier question you indicated yes that the the financial system and the crisis that we're experiencing certainly has an international dimension that's related to globalization but i'm wondering more specifically whether changes in information technology and communications technology the internet but much more than that has erased geographic and cultural barriers and changed the speed of communication and has provided a glut of information much of it highly fallible has this changed the function of of markets just in in quantitatively or is it a difference in kind now it certainly is also an element that has to be taken into account it's not an essential ingredient for say explaining what is going on but it is a contributing factor and and the element of time is extremely important particularly at times of crisis where you just simply don't have the time to gather all the information that would be available if you had the time to collect it and that applies to market participants and i can talk from personal experience and and also of course to the regulators and that is responsible for the increased liquidity preference that keynes recognized and is a contributing factor in the severity of bringing on the crisis and when you look at the incredible increase in volatility that had to do partly with the increased speed of communications but mainly with the much increased range of of of uncertainty that that pervaded the market the fear of the unknown this is going to be the last question there's a gentleman there at the end good afternoon thank you very much for coming my question would be don't you think the biggest problem of this crisis is is judging the the crisis so we talk about regulation but the first step would be judging and as mr said this is international pretty much international crisis so the whole judging would be international who is the one who's the one in charge and and how what do you think about the first step because you say it's a huge crisis other people say it's not that huge uh the question is and i think there's a very good one to to round it off with that uh the biggest problem of a crisis like this is judging how serious it is who should be in charge if it's an international crisis with international dimensions is there an authority there who's in charge is there an authority that is able to assess how serious it is because some people say this is the worst crisis in human history others say well it's already over it was so how can you be confident that there is a regulator out there who can deal or a set of regulators out there who can't deal with crisis actually you don't have a regulator out there and that is the challenge that confronts us because financial markets have been globalized but globalization was based on a false principle that markets don't need to be regulated therefore globalization and deregulation went together and you can deregulate uh in a in a way that forces though the recalcitrant countries to join the deregulation because deregulation puts capital in a position that it can move around freely and it can escape taxation and regulation and therefore it will go where it is deregulated and since capital is indispensable for for the economy countries had to compete in deregulating but when it comes to regulating it doesn't work the same way because the regulation at which is in existence is all based on the principle of sovereignty and different nations have different interests therefore they they will regulate according to their their interests and that actually puts into place a very strong force for the disintegration of global markets through national regulation and and since a multi-lateral system is more efficient than a bilateral system of regulations the challenge is how to create something which currently doesn't exist so it's not a question of restarting the economy it's a question of building a regulatory structure that was not created when markets were globalized well this is an exciting and and it could go on much longer but i do want to thank our very lively questioners and audience at mit and our equally lively audience and highly interactive audience here at central european university we will continue this journey tomorrow when mr soros will outline his concept of open society which is in many ways the heart of what central european university is all about i'm very grateful to anatol koletsky for so expertly guiding today's discussion and of course and above all to thank george soros for continuing to stimulate us in this extraordinary series of ceu lectures thank you

Channel: Open Society Foundations

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Keywords: george, soros, financial crisis, open society, lecture, central european university

Id: Boz97RhrFzY

Length: 69min 4sec (4144 seconds)

Published: Mon Oct 11 2010