Soros: It’s Only Act II of the Crisis

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George Soros said this week in Vienna, “We have just entered Act Two of the drama… when the financial markets started losing confidence in the credibility of sovereign debt.”
Soros once told a meeting organized at the New America Foundation in Washington, DC that there was a test of sorts underway challenging his own economic views and principles.
Soros said that what had burst in September 2008 was a “super bubble” — not just an ordinary asset bubble. This one had different characteristics and thus had to be approached in a different way, according to the billionaire investor.
He told me during discussion that White House National Economic Adviser Lawrence Summers was using normal tools as if the U.S. and global economies had experienced a sizeable, but normal, recession. Soros said, “If I am right, their approach will fail.”
And given jittery markets worried about sovereign debt defaults and new asset bubbles as well as credit-deleveraging consumers and other potential economic shocks, Soros looks more “right” than the Obama team.
As reported by CNBC’s Barbara Stcherbatcheff, Soros also stated:

We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us budget deficits are essential for counter-cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double-dip.

— Steve Clemons

Comments

18 comments on “Soros: It’s Only Act II of the Crisis

  1. David says:

    Thank you, Franklin. You said what I was thinking, only better (and more diplomatically).

    Reply

  2. Franklin says:

    Drew,
    Where does Keynes advocate “perpetual debt financed activity”?
    If you’re going to argue against “Keynesian” economics at least ground the argument in ideas and policies actually advocated by John Maynard Keynes.
    “Keynes posits the restorative effect of a government employing its citizens directly, by borrowing money from other people and spreading it around, under the correct assumption that the spreadees won’t become fascist or communist so quickly.”
    Where does Keynes “posit” this? If you’re talking about the General Theory, which section of which Chapter?
    As far as Iceland goes, Iceland’s economic crisis wasn’t due to the enactment of Keynesian policy. The country’s financial crisis is due to the fact that its private bankers leveraged their own institutions to the hilt playing in foreign mortgage security markets.
    Keynes General Theory outlines a response to a calamity caused by private sector speculation. Its not an endorsement of private sector speculation.

    Reply

  3. Paul Norheim says:

    “…but which of your Nordic economies advances the notion of
    perpetual debt-financed fiscal activity?”
    How on earth is “perpetual debt-financed fiscal activity” related
    to Keynes?
    Sweden followed Keynes’ advices during the bank crisis in the
    early 1990’s. And you are correct that they didn’t bail out Saab,
    or Volvo.
    “This is probably a waste of time.”
    I agree.

    Reply

  4. Drew says:

    This is probably a waste of time, because I don’t think you will
    respond with prosaic observations, much less facts, but which of
    your Nordic economies advances the notion of perpetual debt-
    financed fiscal activity?
    Even Sweden — SWEDEN — refused to bail out SAAB. Which of
    your Nordic tigers advanced the Keynesian idea that fiscal deficits
    do not matter?

    Reply

  5. Paul Norheim says:

    Drew said: “You forgot to say how, of course, but clearly, the
    300-odd million Americans, of which perhaps, we have 4.7
    million immigrant Laotions and Vietnamese (and you don’t),
    should live like they inhabit Bergen.”
    I forgot? You didn’t ask. You asked if there was a single
    successful economy that was keynesian, and I suggested four.
    I do not imply that the Scandinavian economies in any
    meaningful way are comparable to the American economy. I
    also want to point out that of course no economy functions
    strictly according to “Keynes’ rules” (see my exchange with
    Franklin above).
    Drew said: “If the nordic countries embraced repetitive debt-
    financing of year-to-year fiscal requirements, they wouldn’t be
    called countries. They would be called “Greece”.”
    Sure, But what Greece did in the last decade has little to do
    with Keynes. I suggest you read Franklin’s post above (Jun 15
    2010, 11:00PM).
    Drew said: “Norway depends, and thrives, upon its natural
    resource advantage (north sea oil). Norway has determined, like
    Alaska, to share the benefit of this resource with its citizens.
    This isn’t Keynes, this is democratic socialism.”
    Sure, but Finland and Sweden has no oil, and Sweden is closer
    to Keynes than to Milton Friedman or Karl Marx. The Norwegian
    economy is basically an imitation of the Swedish model + oil.
    So is the Danish one, with much less oil. Despite our oil, our
    society is very similar to the other Scandinavian countries –
    except Iceland.
    Drew said:”We also prefer to pay our own bills while we’re alive,
    so our children have better, not inferior lives. Get a grip.”
    Who are “we”? The Americans? That doesn’t make much sense,
    if you take a look at the current facts.

    Reply

  6. drew says:

    Paul,
    Thanks for asserting that the 4.7 million people of Norway
    endorse a political economy designed by Keynes. You forgot to
    say how, of course, but clearly, the 300-odd million Americans,
    of which perhaps, we have 4.7 million immigrant Laotions and
    Vietnamese (and you don’t), should live like they inhabit Bergen.
    If the nordic countries embraced repetitive debt-financing of
    year-to-year fiscal requirements, they wouldn’t be called
    countries. They would be called “Greece”.
    This is just dumb. People cannot take money out of the
    producing sector and say it is in order to make the producing
    sector larger.
    Norway depends, and thrives, upon its natural resource
    advantage (north sea oil). Norway has determined, like Alaska,
    to share the benefit of this resource with its citizens. This isn’t
    Keynes, this is democratic socialism.
    Keynes posits the restorative effect of a government employing
    its citizens directly, by borrowing money from other people and
    spreading it around, under the correct assumption that the
    spreadees won’t become fascist or communist so quickly.
    Keynes says not to worry about the bills coming due, because by
    the time they are due, “we’re all dead.” Well, the bills are now
    due.
    None of this has anything to do with the democratic socialism of
    northern Europe, which is economically sound and balanced.
    Americans, on the whole, do not wish to spread their personal
    assets around to people who do not produce assets of their own.
    We also prefer to pay our own bills while we’re alive, so our
    children have better, not inferior lives. Get a grip.
    For more illustrations of the danger of state-sponsored
    borrowing as an enduring system of social progress, see Iceland.
    –drew

    Reply

  7. Sand says:

    Gary Ackerman [D NY/Israel] speaks again — this time for his Wall Street buddies.
    “Ryan Grim: New York Dems Standing Strong For Wall Street
    http://www.huffingtonpost.com/2010/06/16/new-york-dems-standing-st_n_614402.html
    “…On Monday night, Gary Ackerman, a Democrat who represents Queens, told his fellow caucus members that if reform is too tough on Wall Street — particularly, if it includes a tough derivatives proposal from Blanche Lincoln or a hardened Volcker Rule — the 26 members of the New York delegation may abandon the party on a final vote. He claims that reduced profits for Wall Street translates into lower tax revenue for the state and city, which hurts all New Yorkers…”

    Reply

  8. Franklin says:

    Paul,
    Agreed. In the case of Keynes, I think some people just attach a knee-jerk “socialist” label to him for whatever reason even though he probably would never have described himself as such.
    As an addendum, debt based fiscal stimulus is not free, but given the alternatives its the least-worst option.
    Japan was unfortunate that the global financial crisis hit at a time when it was edging back towards positive growth.
    In the case of Sweden, it increased debt levels substantially in the early 1990s and returned to positive growth. Once the crisis had subsided it was able to restore the health of its public finances. It’s now in pretty good shape even in the face of the ongoing calamity to its south. It’s aggressive handling of its financial sector probably expedited its recovery — something that the Japanese did not do. The U.S. is tracking closer to Japan than Sweden — this is unfortunate.
    In the case of the U.S., it may take 3 or 5 more years to reduce private debts to sustainable levels — provided there is robust fiscal stimulus in the interim. Right now it’s pretty clear that the private sector is incapable of sustaining a recovery on its own — that much should be abundantly clear after the past two years.

    Reply

  9. Paul Norheim says:

    And as a general rule regarding ideas: The more influential they
    are, the more they get distorted. One day someone should write
    the history of misunderstood ideas.

    Reply

  10. Paul Norheim says:

    Good points, Franklin,
    but being slightly more specific than Drew was in his comment,
    neither China nor the USSR, Cuba or North Korea were built on
    Marx’s “rules”. And no national economy has been built strictly in
    accordance with Adam Smith’s “rules” either. The abundant
    misinterpretations of Keynes, Marx, and Smith add to the
    problem as well.

    Reply

  11. Franklin says:

    I can’t think of any national economy that’s built around Keynes “rules,” because his theory of Depression economics applies to a very specific set of economic conditions.
    e.g. Keynes approach at its most basic: When monetary policy is at the lowest possible rate and is unable to stimulate demand in a severe recession, there’s the lever of government spending which can overcome the drop-off in demand and stimulate the economy back to health (not all governments have the capacity to do this).
    The numbers pretty much bear out the success of stimulus under those narrow set of conditions.
    Contra, Drew, unemployment and GNP improved significantly after 1933. Compare the impact of Hoover’s fiscal austerity in the 3 years proceeding 1933 (the economy shrunk by a THIRD in just three years, unemployment shot up 20 percent). FDR’s first three years in office unemployment dropped by about 10 percent and the economy grew by over 20 percent.
    When FDR pulled back on public spending it triggered a sudden drop in output and an increase in unemployment in 1937. Even with the withdrawal of support, the output did not fall to 1933 levels.
    The war itself was the equivalent of a massive government spending and hiring program — so it’s not exactly a rebuttal of the Keynesian approach. WWII effectively ended the Depression for the U.S. — most economists agree on this.
    Japan’s recession in 1997 is a demonstration of the consequences of a premature exit in their own experiment with Keynesian depression economics. The fact that Japan has been able to avoid double-digit unemployment under the conditions of the balance sheet recession that hit in 1989 is amazing in itself.
    The Swedish economic system isn’t “Keynesian” so much as its response to its own real estate bubble in 1990-93 was. The policy response helped to limit the harm caused by the implosion of the debt.
    Keynesian “rules” don’t outline an agenda for all-times and all-conditions — this is something that many of his critics don’t seem to understand. They should go to the trouble of grappling with The General Theory before they start criticizing him for saying and recommending things he never said nor recommended.

    Reply

  12. Paul Norheim says:

    “Incidentally, please identify a single successful economy
    operating per Keynes’ rules.” (Drew)
    As for the last four decades, what about Sweden, Finland,
    Norway, and Denmark?

    Reply

  13. drew says:

    David,
    Soros says that the global financial system is in peril because (in
    part) of egregious over-issue of sovereign debt, and you admire
    his insights. You can look it up. He’s quoted 12 inches up this
    page.
    You advise me that the problem with our US economy is that we
    are not providing sufficient government ‘stimulus’ (i.e., diversion
    of capital from private to public purposes). Any US stimulus is,
    at this point, merely a function of sovereign debt.
    What confuses me is why you think compounding our own
    sovereign debt excesses will bring our public finances into
    compliance with what the admired Mr. Soros directs. The
    internal inconsistencies here are off the charts. As soon as we
    do what he says, the guy will short the dollar and make another
    several $billion.
    Just as a guy who’s been making payroll for a long, long time, I
    still ask the question: if you want to jump-start a dormant
    economy, tell me again why we want the government to capture
    what residual voltage (capital) remains? If you want the
    recession to end, tell me again why it’s going to end if producers
    can’t afford to invest, build, hire?
    Soros is the very boogey-man you describe: rich, immeasurably
    rich, transnational, uninvested in any community, happy to bring
    down a country’s currency if its government’s fiat currency
    diktats drive it into Absurditown. (We’ll ignore his little detour
    into fascism. We were all young and stupid, once.) Guys like me
    live in real towns and create jobs for real people, who work 12
    hours a day to do real things. Which of us understands how
    money works on the ground? Or are the real jobs undertaken by
    real people just collateral damage in a larger story?
    Is it unimportant what happens in real towns with real people
    who use their own money to create real things? Have you
    created hundreds of six-figure income jobs in the recent past?
    Has Soros?
    Net: the government can take our money. Are they going to
    make anything meaningful and durable with it? If so, great!
    Example, please.
    Incidentally, please identify a single successful economy
    operating per Keynes’ rules.
    –drew

    Reply

  14. David says:

    George Soros at least has some understanding of how economies work. Comments like yours, Drew, suggest an utter lack of understanding of how economies work, why, and for whom, and what the costs are for everyone else.
    The very wealthy make the primary decisions regarding capital and economies, and rather obviously while they make huge amounts of money for themselves, they either do not comprehend economies as something of which everyone is a part, or they don’t care because everything outside their narrow vision is an externality.
    And what in hell is Hoyer thinking with this 2-dimensional comment about “spending fatigue.” It is nonsensical, and if it is true, nonsense is carrying the day. Being screwed over fatigue I can understand. It has substantive meaning. But what in hell is spending fatigue supposed to mean, except possibly that people are tired of the economy not benefitting the majority robustly?
    What should be DOA is the refusal to spend what is a small sum, comparatively speaking, for major benefit to working class folk.
    You might also want to go back and see what actually caused the fallback toward recession of the mid-30s. It was attempting “belt-tightening” prematurely.
    And no, the private sector does not demonstrate greater wisdom than the public sector in spending money. It simply has different goals. Besides, money is not a private phenomenon. Governments do best when they allow as much individual authority over this public medium called money as is workable. And that frequently requires government regulations which prevent the very wealthy from running amok with the economy, as was just done.

    Reply

  15. Drew says:

    Borrowing more money from China, Japan and the Middle East,
    in order to give it the public sector unions, will not stave off the
    additional withering of the private sector economy.
    Taking money from the private sector in the form of more
    confiscations will not stave off any additional withering in the
    private sector economy. It didn’t, in the 1930’s, either. So
    referencing Keynes — he of “in the long run, we’re all dead”
    explanation (it doesn’t matter what the long term implications of
    fiscal irresponsibility in government are, because we’ll be dead
    when the bills come due) — is granting wisdom to a cynic.
    If you’re concerned about businesses reinvesting and producing
    more and hiring more, you need to let them keep more of their
    money so that they have the means to do so. It astonishes me
    that people think taking money out of the private sector makes
    the private sector larger and more vital. Or that people who
    view massively self-interested speculators, who profit from
    failed sovereign fiscal policies, as altruists.
    There is a combined $500 billion from the TARP and Stimulus1
    still sitting unspent. Now, I would, of course, just cancel those
    programs and not spend the money, which we don’t have
    anyway (it’s all borrowed, also). But when even Hoyer suggests
    that the populace has “spending fatigue”, I think the Saturday
    Night Surprise (request for another $50B to be allocated to
    public employee unions in states and cities) is DOA.

    Reply

  16. erichwwk says:

    George Soros is reported as saying:
    ‘We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us budget deficits are essential for counter-cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double-dip.’
    As usual, Soros gets it right more than most.
    However, it would have been intellectually more honest to describe that the pressure comes from “the wealthiest”, rather from “the financial markets” as described by NYT Linda Beale (via Mark Thoma) (in discussing Jon Kyl and Congressional action on estate tax)here:
    http://economistsview.typepad.com/economistsview/2010/06/dont-kyl-the-estate-tax.html
    “The fact that lawmakers are not willing to ask the nation

    Reply

  17. Franklin says:

    The double dip sounds like a near certainty at this point — barring a more robust response by national governments.
    It’s frustrating as well to watch the debates in our own Congress right now over a pretty insignificant $50 billion package of aid to state governments. The measure should be taken as as a given at this point. Another round of fiscal stimulus is in order too.

    Reply

  18. Cee says:

    I just attended a conference put on by the Dutch firm DSM in Interlaken, Switzerland that featured noted economist Nouriel Roubini, who predicted the American crash of 2008. Nicknamed “Dr. Death” by the media, he warns of grim economic times ahead: deflation; rising unemployment; increased taxes; over capacity; and negative growth. I have long agreed with his outlook.
    According to Roubini, for the US, the second half of 2010 will be worse than the first. US industrial capacity has fallen from 70 to 65%.
    http://www.lewrockwell.com/margolis/margolis192.html

    Reply

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