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OFF THE PLATE: NOVEMBER 2008

Soros Says, 'Don't Rule Out Depression'

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(Nov. 13, 2008)—WASHINGTON, D.C.—Reuters has reported George Soros, chairman of Soros Fund Management, continues to insist the U.S. is headed for devastating economic meltdown. While testifying today at a House Oversight and Government Reform Committee hearing, Soros said a "a deep recession is now inevitable and the possibility of a depression cannot be ruled out."

The Reuters article outlined the main points of Soros' testimony:

  • Said hedge funds were an integral part of the financial market bubble which now has burst.
  • Said hedge funds will be "decimated" by the current financial crisis and forced to shrink their portfolios by 50-75 percent.
  • Said Fed, Treasury Department and the SEC must accept responsibility to prevent market bubbles from growing too big in future. Said impossible to prevent market bubbles from forming, but they can be kept within "tolerable bounds."
  • Said financial engineering should be regulated and new products approved by regulators, and that such regulation should be a high priority of the new Obama administration.
  • Said a recent IMF credit facility not large enough to stabilize markets.

Soros, a Budapest-born Nazi Germany survivor, has written and co-written a series of books and myriad essays on the global economy.

His legend rests upon building a large fortune through his investment advisory firm, which he founded after settling in the U.S. in post-graduation from the London School of Economics. His intrigue further stems from his fleeing Communist Hungary for England in his younger years and, after making millions, sharing his fortune as a philanthropist.

Soros' testimony today follows a number of articles and interviews where the financial guru has warned against a super-burst of the super-bubble in which Americans have been frolicking for decades. When comparing the most recent housing-market bubble of the post World War II era, Soros spoke of the profound difference between then and now in a Jan. 23, 2008 essay for London's Financial Times.

"The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years."

This "super-boom," Soros says, is a much more complicated process and "got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves."

In this same essay, Soros says the financial authorities of yester-year were better able to intervene in times of economic downturn of the mid 20th century. Not so much today:

"Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so."

Soros also predicts recession for Europe, which he explains in a July 3 interview with Germany's Stern magazine.

"And Europe too, is going about the problem the wrong way. Inflation fear led the ECB to raise interest rates. That is not a smart thing to do. Although the recession emanates from the US, the Europeans are about to import the recession," Soros says.

Sources for this story:

Soros says deep recession inevitable, depression possible (Reuters) George Soros Predicts Recession For U.S. And Europe (Investorazzi) The Worst Market Crisis in 60 Years (Financial Times)

Photo: REUTERS/Adam Hunger

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