George Soros: 'A Period of Wealth Destruction'

Article excerpt

Byline: Rana Foroohar

'We've had a huge number of financial crises in the last two decades, and each time, the authorities have to step in.'

Billionaire financier and philanthropist George Soros has been claiming for decades that Adam Smith was wrong--markets aren't rational and self-regulating, but flawed, bubble-prone and in need of tweaking by the authorities. Now he believes he's been proved right. In his forthcoming book, "The New Paradigm for Financial Markets," Soros connects the financial crisis to his own "theory of reflexivity," which explains bubbles. Coming off a record year (by one estimate, $2.9 billion in 2007), he spoke to NEWSWEEK's Rana Foroohar. Excerpts:

FOROOHAR: You've been saying for years that the laissez-faire Greenspan view of global markets was wrong. Do you feel vindicated?

SOROS: I've held a different view of markets for 20 years, and everything that's happened since has supported it. From the end of World War II until now, we've been in a kind of superbubble, marked by credit expansion based on the dollar as the international reserve currency. The current crisis marks the end of that era. The United States is facing both a recession and a flight from the dollar. The signs were very much visible to those who chose to see them. Unfortunately, many did not.

What were the characteristics of this bubble?

Every bubble has two components--a trend which prevails in reality, and then a misinterpretation of that trend. The two eventually intersect to create a bubble. The trend over the last few decades is that credit has been growing faster than GNP, in both the U.S. and the world. If you look at the two together, you can see a parabolic curve. The misconception that has fueled this trend is that markets can correct this sort of excess, which led to a cycle of deregulation and liberalization. Deregulation reinforced both the rise in credit and the belief that markets correct themselves. But in reality, we've had a huge number of financial crises in the last two decades, and each time, the authorities have had to step in to correct things.

So, how should capitalism evolve from here?

We have to recognize that markets are prone to excess. Authorities bail out the system, which creates a "moral hazard" problem--they need instead to prevent asset bubbles from occurring. …