FT: Transcript: George Soros interview
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Financial Times
Published: October 23 2009 23:32
Chrystia Freeland, US managing editor, interviewed George Soros, the
fund manager, about the state of the world economy, relations between
the US and China, his investment performance and regulating bankers'
compensation. This is a transcript of that interview.
FT: Thank you for joining us, Mr Soros.
GS: It's a pleasure.
FT: How do you judge the state of the world economy? Has the world
recovered from the crisis of 2007/2008?
GS: Well, certainly the financial markets have regained their
composure so they're beginning to function again, and also the world
economy has overcome the shock that it has suffered because for a
while everything froze and now things are moving again. So there is
rebound, but I think that the facts of the crisis will take a long
time for the world to absorb and the main source of the problem is in
the United States. This is where consumers have spent more than they
earned for a period of 25 years; where we have accumulated current
account deficit that reached 6.5 per cent at its peak, which actually
could have continued because there were other countries --
particularly China and the Asian tigers -- that were very happy to run
a continuous surplus and to finance our deficit. So that could have
actually continued, but the households became over-indebted and it's
the consumer who accounts for over 70 per cent of the US economy that
has to cut down, and that will take a while.
Then also you've got the banking system that basically was bankrupted.
It's at the bottom and has to earn its way out of a hole and, again,
it's happening at a pretty fast clip because banks borrow at zero and
buy 10-year government bonds, yielding 3.5 per cent, and that's a
pretty fast rate of earnings for no risk. So, they'll earn their way
out of a hole, but it will also take time. And then there's still the
whole area of commercial real estate, where the losses have not been
recognised. So the source of weakness in the world will be mainly in
the US consumer spending and in, let's say, the decline in the banking
sector.
FT: And is that weakness in the US sufficiently grave that there could
be a W-shaped recovery, that there could be another dip downwards?
GS: Well, I think certainly there could be another dip in the stock
market because, right now we are enjoying the confidence multiplier
and there's a sort of a hope that this is a crisis like the previous
ones and we will just sort of recover in a V-shape recovery. So, when
that hope is not fulfilled, I think that will be ...
FT: Which you are certain it will not be fulfilled?
GS: Well, I can't see it being fulfilled. I may be wrong. I've been
wrong before, but I just don't see where the growth in the US economy
can come from.
FT: Given this continued weakness in the US economy, are people right
to start to be concerned about the dollar?
GS: Well, they are of course and the dollar is a very weak currency
except for all the others. So there is a general lack of confidence in
currencies and a move away from currencies into real assets. The
Chinese are continuing to run a big trade surplus and they're still
accumulating assets and basically the renminbi is permanently
undervalued because it's tied to the dollar. There is a
diversification from assets that are normally held by central banks
into other assets, especially in the area of commodities. So there is
a push in gold, there's a strength in oil, and that is in a way a
flight from currencies.
FT: Is there going to be a tipping point, a moment at which the dollar
is fatally weakened? Or does it just sort of carry on?
GS: As long as the renminbi is tied to the dollar, I don't see how the
decline in the dollar can go too far. Now, of course, to some extent
it's very helpful because with the US consumers saving more and
spending less, exports can be way for the US economy to be balanced.
So, an orderly decline of the dollar is actually desirable.
FT: Does it, at some point, need also to decline against the renminbi?
Does there need to be some sort of a new global currency deal?
GS: No. I believe that basically the system is broken and needs to be
reconstituted. We cannot afford to have the kind of chronic and
mounting imbalances in international finance. So, you need a new
currency system and actually the special drawing rights do give you
the makings of a system and I think it's ill-considered on the part of
the United States to resist the wider use of special drawing rights.
They could be very, very useful now when you have a global shortfall
of demand. You could actually internationally create currency through
special drawing rights and we've done it. We issued $250bn and that's
a very, very useful step, except the rich countries don't actually
need the additional reserves, so all they can do is put it in the shop
window and say, we have got that much extra. But they can't actually
use it. Now I think it could be used to provide global public goods.
The rich countries could put their allocations in escrow. The problem
is that there is a cost to using SDRs. It's a very small cost at the
moment; it's less than 0.5 per cent, but still is a cost, so somebody
has to pay it and I think we have actually the means to do it because
the IMF has very large gold reserves -- kept in the books at a very
low price -- and it has been decided to use those gold reserves to the
benefit of the least developed countries. So, the IMF could actually
pick up the cost of paying for the special drawing rights ...
FT: Using its gold reserves?
GS: And, in fact, it's being done. It hasn't had any publicity, but I
understand that in Istanbul a deal was signed where I think the UK and
France actually transferred $2bn of their SDRs, or 2bn SDR worth to
the least developed countries, and the IMF picks up the cost. So, it's
a road that's already being used and it could be used on a larger
scale.
FT: What sort of a financial deal should Obama be seeking to strike
when he travels to China next month?
GS: I think this would be time because you really need to bring China
into the creation of a new world order, a financial world order. They
are kind of reluctant members of the IMF. They play along, but they
don't make much of a contribution because it's not their institution.
Their share is not commensurate ... their voting rights are not
commensurate to their weight, so I think you need a new world order
that China has to be part of the process of creating it and they have
to buy in. They have to own it the same way as, let's say, the United
States owns the Washington consensus, the current order, and I think
this would be a more stable one where you would have co-ordinated
policies. I think the makings of it are already there because the G20,
in agreeing to peer reviews, effectively is moving in that direction.
FT: Do you think it's possible to persuade China to allow the renminbi
to become stronger?
GS: I think that they would be ... they've been advocating for it, so
I would take them at their word and use this as a special drawing
rights more often and make the renminbi, even though it's not
convertible, part of the SDR. In other words, it should be one of the
currencies used in the special drawing right arrangement, and that
will bring them in.
FT: And that's possible even with the renminbi not being convertible?
GS: Yes. Yes. It has been considered before and I think the Brazilian
real should also be part of it. I think that a number of currencies
which constitute a basket can be and should be increased.
FT: And what about the American concern that aiding and abetting this
move away from the dollar as the world's reserve currency ultimately
means a weakening of the US economy?
GS: No. I think that is ... I mean, we did have great benefits from
it, but we have abused it and I don't think we can continue abusing it
anyhow. So it is not necessarily in our interests to have the dollar
as the sole world currency because as the world economy grows, it
needs an additional currency and, if the dollar is that additional
currency, it means that the US has to have chronic current account
deficit. And that is not appropriate. I think it's in our interests as
well to reform the system.
FT: At least in the short-term, though, isn't it very convenient for
America that the rest of the world is underwriting American spending
right now?
GS: Yes, it is, but the willingness to do so is greatly diminished. I
think that you will find that effectively China will buy less and less
of the US government bonds because it will have a smaller surplus for
the United States because China will be diversifying. It will be
lending to Brazil and South Africa and other countries in order to
finance its exports to those countries. So I think this is a healthy,
if painful, adjustment that the world has to go through.
FT: If America doesn't actively take part in this sort of
renegotiation of global finance, what will happen? What's your
nightmare scenario?
GS: Well, the Chinese will go bilateral. They already do it. They
already have a clearing arrangement with Argentina and I think they're
working on one with Brazil, and you will find that there will be more
and more bilateral arrangements. So the dollar will remain the main
international currency, but its use will decline. So I think that a
world of bilateral relations is less desirable than a continuation of
a multilateral system. But the system we have now has actually broken
down, only we haven't quite recognised it and so you need to create a
new one and this is the time to do it.
FT: In the United States, how worried are you about the budget deficit
and maybe about the possibility of inflation?
GS: Well, certainly a decline in the value of the dollar is necessary
in order compensate for the fact that the US economy will remain
rather weak, will be a drag on the global economy. China will emerge
as the motor replacing the US consumer and, of course, it's a smaller
motor because the Chinese economy is much smaller. So the world
economy will have less of a motor, so it will move forward slower than
it has in the last 25 years. But China will be the engine driving it
forward and the US will be actually a drag that's being pulled along
through a gradual decline in the value of the dollar.
FT: And, domestically, what about inflation? Is that something that
you're worried about?
GS: Well, it could be if lending restarts and the balance sheet of the
Federal Reserve is not shrunk commensurately, but I think this is
something ... it's a delicate manoeuvre, but I think it can be done.
So there would be a slow decline in the value of the dollar, a managed
decline, and that would be the adjustment that needs to be
accomplished. Now it could actually get out of hand and certainly the
fear of inflation will precede inflation itself and actually the fear
of inflation in the markets -- let's say, driving up interest rates --
could then forestall the inflation and push the economy back into a
recession. So you would have stop/go kind of economy which is similar
to the '70s.
FT: How worried are you about the Fed taking maybe a more hawkish
position in raising interest rates possibly too soon?
GS: It's unlikely to do it because they have the Japanese example in
front of them and they see that the Japanese did it a few times and it
has actually set them back. So, 25 years of excesses have to be worked
off .
FT: And what about President Obama? Should he be more worried about
budget deficits or more worried about the recovery fading away?
GS: I think he is more concerned about the recovery fading away. He's
concerned about the unemployment and I think he is right to be
concerned. Now, the trouble is that it seems that businesses are
extremely cautious and even as you have some recovery, they don't
actually hire. They actually are producing good profits by cutting
costs and so you're going to have continued unemployment.
FT: Just over a year ago, Lehman went bankrupt and we had a financial
crisis that many people feared would be as severe as the Great
Depression. There now seems to be, particularly on Wall Street, a
recovery. How real is that recovery?
GS: The stock market is pretty real. We have had a good run because an
awful lot of money is on the sidelines and it earns no money at all
and gradually it's being sucked in to the market. And probably that
process will continue for the rest of the year.
FT: So you expect the market to continue rising to the end of the
year?
GS: I mean, one can't predict these things. You never know when the
turn comes, but it seems that way because the lack of recovery in
employment is going to assure that interest rates are not going to be
raised. And, at the same time, earnings are reasonably good and
there's a lot of money on the sideline. So, I think those are actually
favourable conditions for continued gradual market recovery between
now and the end of the year.
However, the economy will continue to require additional stimulus in
order to keep it going, because the recovery is basically fuelled by
this transfer of payments and deficits that the government is running
and if those were withdrawn, then you would have a double dip in the
economy. So, in order to avoid that, you will need continuing
stimulus. Now, whether politically that's feasible or not remains to
be seen, of course, because it does pile up the debt and that means a
burden for future generations, but the alternative would be another
recession or a longer lasting recession.
FT: How do you rate your own performance as an investor over the
crisis? And what are you betting on now?
GS: I came out of retirement in order to preserve my capital and I
succeeded in doing that. I've now gone back into retirement and the
fund is chugging along and is giving a decent return, so I'm very
satisfied.
FT: Do you think the world is safe enough now for you to go back into
retirement?
GS: I don't think that I can contribute currently to running the fund
because my knowledge now is increasingly out of date and I had to use
macro instruments to protect against the storm. But the storm has
passed. You now have the aftermath of the storm and now it is, again,
a question of knowing individual companies and my knowledge is now
outdated, so it would be inappropriate for me to be in there.
FT: It's not a question of also making judgements about the global
financial arrangements?
GS: I also feel that actually I can probably contribute more when I
spend my time thinking about the system than trying to make more
money. The use of my remaining time I think is better spent now on
being concerned with reforming the system because the system actually
does require reforming and I may have a contribution that I can make
to it.
FT: When it comes to financial reforms in the United States
specifically, what are the most necessary ones? What are the most
necessary measures?
GS: You do need to regulate the banking system. Basically you've now
given an implicit guarantee to the banks that are too big to fail and
you have to then regulate them in order to ensure that the guarantee
is not invoked. That's the job of the regulators. They fell down on
it. They let the banks regulate themselves and the banks ran away with
that opportunity and got into trouble, so you can't let them get away
with it, run away with it. You have to reduce the amount of leverage
that they allowed to use. You have to recognise that there are
systemic risks that the individual participants don't necessarily have
to take into account because, as individual participants, they can
expect to sell the securities to someone else, but if everybody is on
the same side, then you can't. You create a crash when the individuals
try to do it. That's what happened. So you have systemic risks which
are not identical to the risk of the individual participants and that
is the job of the regulators to guard against.
And you have to recognise that the whole concept of how financial
markets operate was false, namely the idea that they tend towards
equilibrium. They don't. They actually are prone to generate asset
bubbles and so the regulators have to accept responsibility about not
letting those bubbles become self-reinforcing and create a crash. That
responsibility they expressly refused. They said, we can control the
money supply, but not asset bubbles, and they have to accept
responsibility for it, knowing that they will always mistakes.
However, when they control credit, they take a step and then they get
a feedback from the market and so the feedback will tell them whether
they've done enough or whether they have to do more. So this feedback
helps to correct and get close to maintaining balance. This is a
responsibility that they have shirked and they now have to accept, and
for that purpose, they have to use instruments which have fallen into
disuse. These are the margin requirements and minimum capital
requirements. Now, those requirements have to be varied from time to
time to counterbalance the prevailing mood of the markets. So if the
markets are euphoric, you have to tighten the margin requirements. If
they are, as they are now, despondent, then you can let it loose. And
because of that, this is not actually the time that you want to impose
those requirements, but you have to prepare for doing it. And at the
time when the economy restarts, lending restarts. That will be the
time to impose tighter capital requirements on banks.
FT: Are you confident that when things get better, when the economy,
when the financial sector are more robust, there will be sufficient
political will to impose the sorts of restrictions you're discussing?
GS: No. No. Because actually banks are very influential politically
and now the remaining banks ... we've got three or four banks that
dominate the banking scene in the United States. They have a quasi-
oligopolistic position and they want to use that clout to protect that
position. So you will have a big political struggle to get the right
kind of regulation through.
FT: Do you think the government, the Obama administration, will win
that struggle? Or are they engaged in that battle or have they given
up?
GS: I am afraid that they have not done enough and I hope that they'll
do more, and I'll certainly be out there urging them to do it.
FT: Should proprietary trading by too-big-to-fail institutions be
limited?
GS: I think that the payment, the incentive schemes, have to be
controlled because if you give them a guarantee, you have to ensure
that they are not taking risks with their own capital that could then
force you to put in additional capital. With the too-big-to-fail
concept comes a need to regulate the payments that employees receive.
FT: So the government should regulate compensation at Goldman Sachs,
for example?
GS: That's right.
FT: And how should it be regulated?
GS: And that would push the risk takers who are good at taking risks
out of Goldman Sachs into hedge funds where they actually belong,
because hedge funds take risks with their own capital, not with the
deposits and not with the government guarantees.
FT: How should compensation at the too-big-to-fail institutions be
regulated? Should there be pay taps, should there be clawbacks that
are required?
GS: First of all, there would have to be a much longer period over
which payments are made because certainly they would have to last the
lifetime of the contracts ... I mean, in the case of derivatives. And
I think that right now, banks are actually getting hidden subsidies of
very enormous amount because of their ability to borrow at effectively
zero and buy 10-year government bonds at 3.5 per cent. So those
earnings are not the achievement of risk takers. These are gifts,
hidden gifts, from the government, so I don't think that those monies,
for instance, should be used to pay bonuses. And so there's a
resentment which I think is justified.
FT: And what should the President do or Tim Geithner? Should they say
there's no Goldman Sachs executive can be paid more than $5m this
year? How should they act?
GS: Yes, probably. Frankly, I have not thought it through, but there
would have to be some limits on what you can earn if you are working
for a bank whose deposits are guaranteed.
FT: And you think it's appropriate for the government to actually set
a dollar figure on the maximum, say?
GS: Yes. I mean, I don't know whether there should be an absolute cap.
That I haven't thought through.
FT: I think if Lloyd Blankfein were participating in this
conversation, he might argue, Mr Soros, that you're talking your own
book and saying all the best risk takers should work for hedge funds
rather than for banks like Goldman Sachs. How would you respond to
that?
GS: I am on record in advocating the regulation of hedge funds as well
and make a big point of not taking my personal interest into account
when I'm talking about systemic reform, so I stand by my position on
that.
FT: Do you think the big Wall Street firms are sufficiently aware of
the public resentment of the big profits some of them are making this
year? Is it a dangerous moment for them?
GS: I don't know if they are, but I think that there is a resentment
and I think it will make itself felt, and it may easily lead to the
wrong kind of regulation. The danger is with regulation that because
of these emotional issues, you get the wrong kind of regulation, so
it's not in the interest of the industry actually to lobby too hard to
protect itself.
FT: Thank you very much, Mr Soros.
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