Saturday, October 11, 2008

Soros speaks the truth

The bottom line from George Soros, from this interview with Bill Moyers (via Barry Ritholtz). Read the whole transcript, or watch the interview -- there's much more about the credit crisis, modern finance, etc.

GEORGE SOROS: ...this belief that everybody pursuing his self-interests will maximize the common interests or will take care of the common interests is a false idea. It's a suitable idea for those who are rich, who are successful, who are powerful. It suits them to justify you know, enjoying the fruits without paying taxes.

It would be much easier for Soros to wax eloquent about how greed is good, greed works, markets are efficient optimizers, etc. He is, after all, a huge winner in the capitalist system. But he's seen too much to buy everything that Ayn Rand and market fundamentalists are selling.

Longer NYBooks article on Soros by John Cassidy, who covers business and finance for the New Yorker.

In 2007, after the subprime crisis erupted, he returned, at the age of seventy-seven, to directing Quantum's investments, with results suggesting he hadn't lost his touch. Alpha magazine, a glossy publication that covers hedge funds, estimates that he made $2.9 billion in 2007, placing him second on its list of mega-speculators, behind only John Paulson, of Paulson & Co., who raked in an even more astonishing $3.7 billion.

Earlier post on investor John Paulson, who made $15B for his fund betting against the credit bubble.

21 comments:

Anonymous said...

This belief that everybody should be free in pursuing his self-interests is the only morally tenable position a free society can take. Whether or not this belief maximizes common interests is merely incidental.

Anonymous said...

I will never understand why Soros doesn't get that the Nazis were the National Socialist German Workers Party. The same ideology that oppressed him, he seems to support and fund now.

Anonymous said...

"I will never understand why Soros doesn't get that the Nazis were the National Socialist German Workers Party. The same ideology that oppressed him, he seems to support and fund now."

That's one steaming pile of bull-shit. I suggest you brush up on your reading of history if the point of post hasn't been to just insult.

Anonymous said...

Soros is wrong and so are you Steve. More seriously, what are you trying to say?

Individual self-interest is an assumption of social models that built up from the individual level, What theory or model is Soros offering? What are you proposing?

Emergent properties of agent based models suggest that altruism doe arise from the simple self interest assumption.

Steve I continuously am surprised how such a bright guy like you make such absurd assertions that are based upon nothing but ideology.

Soros sold his sole for money while a youth. History records that fact.

Dave Bacon said...

"Soros sold his sole for money while a youth. History records that fact."

That explains why I've never seen him without shoes. Who wants to see a guy with no soles?

Steve Hsu said...

For anonymous, here is more from Barry Ritholtz

http://bigpicture.typepad.com/comments/2008/10/putting-the-dog.html

PT said...

Pay closer attention to the quote posted by Steve.

Of course we must work under the assumption that individuals will act in their self interest. It does not follow, however, that such actions "will maximaize the common interest." This is precisely the reason why we do not live in a completely free society, but place restrictions on permitted human behaviour.

Anonymous 4:43 and anonymous 8:59 need to check their axioms.

G said...

Aren't Soros's comments all kind of obvious? Its pretty easy to construct thought experiments where what he says will be true. As pt says, you put regulation into the mix so you have something between communism and capitalism. The real question is, can you ever get the regulation right before things blow up? Or does it take a crisis to point out the regulatory flaws?

In this instance, I think it was pretty obvious to most people that there was an enormous asset bubble, and regulators should have been able to spot that things were likely (certain?) to blow at some point. Perhaps they wanted it to blow and this is all part of some machiavelian scheme... Otherwise I can't see how the regulators can escape from accusations of incompetence.

One thing that frustrates me about discussions of this nature about whether it is "correct" to have a particular set of tax policies or economic policies or whatever is that they are discussed back to front. The question one should ask, IMHO, is "What kind of society do we want?" - but in a quantitative sense ie. What kind of income distribution do we want, what kind of health statistics do we want, what distribution of government expenditure do we want etc... And then you construct your policies in an experimentally verified manner. What I'm getting at is I don't believe there is any characteristic of capitalism that I would call fundamentally "right" in an absolute moral sense; what I have as beliefs are characteristics of the resulting society ie. what the income distribution should be, what the distribution of monetary power should be. If you believe in democracy, then the resultant government policies should be designed to meet the sum of everyone's collective "distribution of desires" - but in a quantitative sense. (Hmmm, that sounded a lot better in my head!). Otherwise you always get bogged down in arguments that essentially boil down to "communism is evil", no "capitalism is evil" ad infinitum... which are less than illuminating.

My own personal opinion is if you apply a simple distribution of wealth in society metric to the current situation, you conclude that something is seriously out of whack somewhere (without wanting to get into questions like "Is it good that people at the very top do very well from an evolutionary point of view?"); but thats just my opinion and as a result pretty irrelevant.

nick said...

What are Soros doing while economic's crisis?

wolfgang said...

Steve,

I think it would be easier if you (or Soros) would tell us what "the common interests" are.

Anonymous said...

Wolfgang,

I think it's fair to say that all participants in free societies that rely on market mechanisms have a common interest in a functioning banking system and credit markets. We've just seen unregulated parts of those markets do a level of damage to our economic system that exceeds the wildest dreams of Al Qaeda fanatics, who destroyed the World Trade Center 7 years ago in large part because it was a symbol of American and western capitalism. One is reminded of some espionage cases from several years ago, in which American citizens sold vital classified information to foreign powers largely for financial reasons (combined with sheer arrogance).

The world's economic system is, like a computer network or an electric power grid, an engineered system. Unless certain constraints are imposed on the way participants use and interact with it, that system can be brought down, to the detriment of everyone who depends on it. Anybody who is responsible for the reliable functioning of such a system understands that. Millions of ordinary people, responsible for families, communities, and thousands of small businesses, have no trouble understanding that.

Re g's comment: As for incompetence versus Machiavellian [Ayn Randian] motives for inadequate regulation, see this withering assessment of Alan Greenspan's legacy in the New York Times.

wolfgang said...

> We've just seen unregulated parts of those markets do a level of damage to our economic system

I am not so sure about that. I think regulated entities did the truly dangerous stuff. In fact relying on regulation (Basel 2 in Europe, OFHEO in US) encouraged perhaps the most stupid behavior.

STS said...

wolfgang:

"relying on regulation (Basel 2 in Europe, OFHEO in US) encouraged perhaps the most stupid behavior."

Regulation has to be judged by its effects. Same as for, say, laws about how we use our cars on the road. If a rule like, say timing of certain traffic lights leads to constant traffic jams, somebody eventually adjusts them.

A lot of regulation gets gamed by those under regulation -- "regulatory capture" is the usual term for this. That doesn't make regulation generically bad, it only means that we have to actually *think* about what the rules should be.

Basel 2 capital requirements were arguably set up to facilitate letting the regulated do more "self-regulating" in the optimistic (not to say naive) belief that this would work better than having an independent 3d party inspect.

milkshake said...

A common-interest example: rules that encourage fair business practices. The common interests do not have to be always precisely defined (and the ideal solution found and made into a law)- every rule and system of government can/should be changed once it outlived its usefulness. Please note that Soros is not an enthusiatic big-government fan, if anything he is an anti-authoritarian pragmatic.

George Soros understands self-reinforcing investor bias better than anybody else. He claims that decades-long global super-bubble just bursted and that US deficit spending cannot continue to be the main force of the World's economy.

What Soros is arguing in this interview is that globalisation-and-deregulation orthodoxy failed and that the New World Order will include more regulations and government interventions, and a less prominent role for US.

wolfgang said...

It seems that (at least in comments here) 'common interest' could mean 'stability of the banking system'.
But what does that mean exactly?

Minimizing the number of bank failures? Or, on the other hand, making sure that incompetent banks with too much liabilities get removed quickly from the system?
The capability to protect against such failures using CDS? Or strict regulation which ensures that only people who do not need it can get a loan?

milkshake said...

Re-capitalisation first, improved regulation and oversight next, in the long run Soros suggests a New-Deal-scale commitment to infrastructure modernization, improved energy efficiency and green technologies innovations.

[I am weary of the anti-global warming agenda part. http://www.harpers.org/archive/2008/02/0081908 ]

Soros does not pretend to know the precise definition of the common interest, and I think he would be first to concede that his long-term spending proposals might be flawed, and that too much government control is a road to Serfdom. But Soros' main point in this interview - that unregulated financial markets have great inherent systemic risks and can self-destruct, and that the Chicago School orthodoxy got us in the current mess - is manifestly sound.

wolfgang said...

> the Chicago School orthodoxy got us in the current mess

Maybe. I leave that to smarter people to decide.

But notice that the banking crisis is truly worldwide. From Iceland to hungary and the Ukraine and from the US to China. Did they all follow the Chicago Orthodoxy?
I dont think you will find much C.O. in Germany, just the usual social democratic type of thinking. And yet they are in as much trouble as all the others.

My explanation would begin with recognizing that stupidity and greed are mostly independent of ideology and 'schools'.

milkshake said...

Wolfgang, US has been the most influential player - many countries you mentioned as a counterexample are not, and irrespective of what economic policies their governments were pursuing lately these countries went down first simply because the little and feeble ones are trampled to death first.

This self-fulfilling delusion mechanism operated in the global system that obscures and even encourages irresponsible investment, and this is feeding on the libertarian mantra that deregulation and cheap lending is good for the growth, that the market forces will take care of most problems like a good autopilot, and namely that the financial industry is most competent at managing its own risks.

Anonymous said...

Actually, Milkshake, the free market fundamentalists would say that market forces are taking care of the problems right now; no disaster is too big to make them question this assumption. (Baron Rothschild: "Buy when there's blood in the streets, even if the blood is your own.")

---------------------

As for stupidity and greed, they do indeed exist independent of ideology, but what is not independent of ideology is the notion that stupidity and greed should be given free rein, even if they undermine the foundations of the entire economy for most of its participants, ie, the ones who aren't professional gamblers, bandits, and self-preserving sociopaths. Again, consider what it takes to maintain the integrity of distributed engineered systems, not to mention a civil society.

To these people I say: You want an unregulated market? Try Somalia. Of course you'll find that your economic freedom is constrained by your local warlord and random criminality, but hey, that's okay as long as there isn't a government involved, right?

Anonymous said...

Philosophizing aside, a great data-backed summary of the current mess.


http://www.techcrunch.com/2008/10/10/sequoia-capitals-56-slide-powerpoint-presentation-of-doom/

wolfgang said...

>> consider what it takes to maintain the integrity of distributed engineered systems

Actually, I think it is useful to distinguish standardization from regulation.
I am all for simple and powerful standards, like IP and TCP for networking or standardized commodity contracts trading on an exchange in finance ...
Simple and reasonable accounting standards are obviously important for functioning markets.

On the other hand, I understand regulation as rules about what people are not allowed to do and they usually point to weaknesses in our standards and also create usually just incentives to get around those rules.

An engineer normally wants reliable standards and not regulation (e.g. managers telling them what they can and cannot do).

Finally, de-regulation was obviously a large positive force for telecom and while telephony in Austria was perhaps more reliable in the 1980s, regulated by the Austrian Telephone&Telegraphy monopoly, it was certainly much less efficient, much more expensive and indeed quite annoying compared to how telecom works now.

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