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Soros: Worst Financial Crisis Since World War Two

George Soros, the Hungarian-born billionaire investor, philanthropist, and author, told the Austrian publication The Standard that the world was facing the worst financial crisis since World War Two. Speaking to other news agencies, the former Quantum Fund head also warned the economies of the United States and United Kingdom are threatened by recession. Soros, most widely known as “The Man Who Broke the Bank of England” after he earned $1.1 billion speculating on the British pound in 1992, said in The Standard interview released Monday that, “The situation is much more serious than any other financial crisis since the end of World War Two.” He explained that over the past few years politicians subscribed to something called “market fundamentalism,” which, he said, was “the wrong idea.” Soros told the BBC earlier today:

Markets have been left to their own devices and the authorities came to rely on the markets to right themselves. They ought to have known better. They ought to know that the markets don’t necessarily right themselves.

As a result, Soros said, “We really do have a serious financial crisis now.” Today at the World Economic Forum in Davos, Switzerland, the legendary investor explained:

From the 1980s we had the belief in the magic of the marketplace, and the authorities were so successful that they started to believe in this market fundamentalism. That’s gone too far.

He added, that in times of crisis:

They suspended the rules and they bailed out the banks. That created an
asymmetric incentive system, a moral hazard, that allowed the expansion of credit.

The current crisis has its roots in the U.S. housing boom and subsequent bust, along with the resulting subprime blowup. Now, Soros says the monetary authorities must be ready to rescue markets in turmoil and should impose more regulation, not less.

“Yeah, it’s that bad…”

When asked during The Standard interview about whether he thought the United States was headed for a recession, he said, “Yes, this is a threat in the United States.” He also added that he was surprised of how much the threat of a recession in Europe has been downplayed. Today on the BBC, when asked if the U.S. and U.K. economies were headed for recession, Soros replied, “I think it will be very difficult to avoid it.”

The chair of Soros Fund Management also talked about the outlook for the U.S. dollar. According to Reuters, at Davos today he said the world is no longer willing to accumulate dollars. Soros claimed:

Financial markets do need a sheriff … The rest of the world is unwilling to accumulate dollars. The present crisis is the end of an era based on the dollar as the international currency. We need a new sheriff, not Washington consensus.

According to Bloomberg, the U.S. dollar’s share of global foreign-exchange reserves fell to a record low of 63.8% in Q3 2007 as demand for U.S. assets waned after the collapse of the U.S. housing market (from International Monetary Fund data). This was down from 65% three months earlier. The greenback dropped 11% against the euro and 13% against the yen in the past year, continuing its decline in five of the past six years.

The legendary investor linked the growing financial crisis with the dollar’s decline. Soros told forum attendees today:

The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.

“Everybody, sooner or later, sits down to a banquet of consequences.”
-Robert Louis Stevenson, Scottish essayist, poet, and author