George Soros: Worst Economic Crisis in 75 Years

Its going to be a George Soros morning here on The Housing Time Bomb. Although I am not a fan of his far left politics, I must admit he is right on in terms of what's going on in the economy.

I found two great interviews with Mr . Soros. The first interview is from Money. Here are some of his quotes:

"Question: In your 50 years in finance you've seen any number of crises. Why is this so bad?

Answer: Because two bubbles are deflating at once. There's the collapse of housing prices, of course. On top of that there's the end of what I call the superboom of credit expansion that has been going on for 25 years. That was made possible by a stable global financial system in which the dollar was the world's primary currency. Now, for many reasons, the system is in question and nothing has taken its place. That has created great uncertainty.

Q. And for us regular people it means...?

A. The days of rapid financial wealth creation are over. We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.

Q. Don't feel you have to sugarcoat your answer just for my sake.

A. Since the 1980s, the global financial system has been dominated by an ideology I call market fundamentalism - the idea that markets are perfect and regulations are always flawed. But markets aren't perfect. Left to their own devices, they always go to extremes of either euphoria or despair. The Federal Reserve and other regulators should recognize this, since they've had to bail out the markets in crisis after crisis since the 1980s.

Q. Can't the Fed just bail us out again?

A. The Fed's first duty is to prevent the financial system from collapsing. It's shown it can do that, and the markets are breathing a sigh of relief. But we can't avoid the fallout in the real economy. We're facing not only recession but also inflation and a flight from the dollar. To fight recession, the Fed needs to increase the money supply, but that only makes the dollar weaker and inflation worse. That's why I think this crisis is so serious. The Fed's power to intervene is limited.

Q. And the lesson in that?

A. It's important in life and in investing always to question yourself. Understand that you may be wrong, especially when you believe too firmly that you're right."


My Take:

Mighty sobering words aren't they? I will say it again. I love listening to guys who are not working for Wall St. and speak their mind versus talking their book. These are the guys you need to listen to in times of crisis.

I have been discussing all of these issues on here for the last few months, and its nice to see the mainstream media is now staring to pick it up.

Anyone that thinks this crisis is over has made a big mistake. I thought his last quote was very insightful on investing. The great bull market has had its way for over 20 years now, and feels unstoppable at this point.

The bulls continue to insist that the roaring bull is coming back after a little pause here. The facts tell you otherwise. Once this reality is realized its going to be ugly.

The bulls think the FED and Wall St. are invincible, and they are investing based on "the bull comeback" thesis.

As Soros explains above, the FED can only do so much and their ability to intervene is limited. Fighting two bursting bubbles will simply be too much for the economy to withstand.


Soros #2

Here is another interview with Soros from the USA Today. He talks here about his reflexivity theory. I find this to be very interesting. We do not act like Quant computers when we invest. Investing often involves emotions. Wall St.'s computer models never included this side of investing when setting up these investing instruments. Some points from the piece:

"In his latest work, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, Soros traces a straight line between today's financial turmoil and what he says are fatally flawed conventional assumptions about how markets behave. If banks, investors and regulators had embraced reflexivity years ago, there never would have been a financial crisis, Soros insists.

To Soros, the conventional approach is rubbish. Instead of a world of near-identical actors, coolly assessing their economic interests and acting with clear-eyed precision, he sees a world (and markets) governed by passion, bias and self-reinforcing errors. Because fallible human beings are both involved in, and trying to make sense of, this world, they inevitably make mistakes. Those mistakes then feed on themselves in "reflexive" ways that, when taken to extremes, result in situations such as the now-deflating U.S. housing bubble.

Standard economic theory is flawed, Soros says, because it treats markets populated by thinking human beings as if they operated according to the natural laws that govern atoms and molecules

What does this have to do with house prices in Las Vegas or credit availability in Tampa? Plenty. Only people who were overly confident about how markets operate could have come up with the innovative financial instruments — such as collateralized debt obligations (CDOs) — that ultimately proved so toxic. The banks that developed and sold these products did so comforted by arcane mathematical models that ostensibly demonstrated how these securities would behave under various scenarios.

The only problem was that when the crunch hit, the securities didn't behave the way the models said they should. That came as a surprise to the bankers responsible for the models. Soros said it wouldn't have come as a surprise to anyone who believed in reflexivity.

He anticipates further sharp declines in housing prices and says, when pressed, that Americans ultimately won't escape this episode without suffering a noticeable decline in their standard of living.

"I'm afraid that will be the case, and it will be hard to take," he says. "And it will be politically unpalatable, and it will probably give rise to all kinds of populist political appeals (for) a way out that will also be very dangerous"



Bottom Line:

People are human and will always make mistakes. Wall St. underestimated this when putting together the housing/credit boom game. Money should have never been so easy to acquire. People will hang themselves if you give them enough rope. The housing boom is a perfect example of this. The result of this according to Mr. Soros will be devastating.

Enjoy our bubbly standard of living for now because we are in for a rude awakening as this debt bubble bursts. Get out of debt and batten down the hatches!!

We have a financial storm coming of the likes we haven't seen since the 1930's.