Global Financial Crisis: A Need for Rethinking the International Monetary and Regulatory System:
Mervyn King emphasizes that the current financial crisis is distinct and requires a fundamental reassessment of the international monetary and regulatory system.

Critique of Current Regulatory Approaches:
King points out the limitations of the current regulatory system, which is national rather than global and fails to address the interconnectedness of different financial sectors.

Specific Issues in Europe:
He highlights the flaw in the European regulatory framework, where financial institutions authorized in one country can operate across the European Economic Area without local oversight. King emphasizes the need for a central regulatory authority to oversee pan-European institutions and suggests that the United Kingdom may pose an obstacle to establishing such an authority.

Global Regulatory Challenges:
King acknowledges some progress in global cooperation, such as the inclusion of emerging economies in key international groupings. However, he stresses the need for a more comprehensive global financial organization like the WTO. He notes the US’s resistance to ceding financial sovereignty to a global body and the failure of summits to address this fundamental issue.

Shift in Economic Gravity to the East:
King acknowledges the shift in economic gravity towards the East as a consequence of the crisis. He emphasizes the need for China to engage actively and recognize its increased significance in the global economy.

The Chinese Economic Growth Model:
China’s policymakers recognize the risks associated with unbalanced growth and the reliance on export-led growth. The excessive reliance on export-led growth makes the economy vulnerable to events beyond China’s control.

The Challenges of Escaping the Growth Model:
Escaping the export-led growth model is difficult. Integrating China more closely into the world economic system is necessary to understand the true nature of interdependence.

The Role of Hong Kong in China’s Economic Development:
Hong Kong’s international character and rule of law make it an important player in China’s economic development. Shanghai will grow in importance, but Hong Kong’s role in the world is likely to remain significant.

Copenhagen Talks and Climate Change:
The chances of a substantial international agreement on climate change in Copenhagen are low. Most countries recognize the seriousness of the global climate change problem, but there are challenges in reaching an agreement due to differing national interests.

The Global Financial System and Climate Change:
The global financial system can provide the necessary funds for climate change mitigation and adaptation efforts. However, there are challenges in mobilizing these funds, including the need for international cooperation and the development of appropriate financial instruments.

China’s Remarkable Transformation:
China has undergone a significant change in attitude towards climate change since 2005. The country recognizes the internal need to address climate issues, acknowledging the impact of melting Himalayan glaciers and water problems in North China.

Different Approaches to Climate Action:
China’s approach to climate action differs from that of Europe and the United States. An international system for carbon pricing faces challenges due to varying approaches among countries.

The Importance of an International Fund:
There is an opportunity to establish a substantial international fund to address climate change globally. This fund could focus on forestry and agriculture, where significant potential savings can be realized.

SDRs as a Funding Mechanism:
Special Drawing Rights (SDRs) can provide an avenue for funding this international fund. Wealthy countries could renounce their SDR allocations, allowing them to be used for the fund.

Gold Reserves for Least Developed Countries:
The IMF’s gold reserves could be utilized to cover the cost of using SDRs. This would benefit least developed countries, as the gold reserves are designated for their benefit.

A Potential $100 Billion Fund:
It is feasible to establish an international fund of $100 billion, potentially in time for the Copenhagen climate summit.

American Leadership and Legislative Hurdles:
Lack of American leadership on climate change is not solely due to President Obama’s priorities. A specific law in the United States requires Congressional authorization for the use of SDRs. European countries could take the lead in establishing the international fund, as they do not face the same legislative constraints.

Regional Free Trade Agreements:
Regional free trade agreements can be both a handicap or a stepping stone towards global progress. An ideal international structure would encompass both regional cooperation agreements and a global agreement.

Reflexivity and Manipulation:
The epistemological problem of understanding reality, as highlighted by Prof. Soros, is compounded by the manipulation of reality by agencies and agents.

Bubbles and Market Fundamentalism:
Bubbles, the silent atomic bombs of the time, are created by market fundamentalism, prompting a need for careful regulations.

Private Interest and Common Goods:
Private interests alone cannot bring common goods. A combination of private interests with other ideas, propositions, and philanthropy is necessary for the realization of common goods.

Open Society and Democracy:
Democracy is necessary but not sufficient for an open society. Moral values must prevail over the power of majorities to ensure an open society.

International Cooperation or National Dependence:
International cooperation is essential, as opposed to the dominance of a few countries over the rest of the world.

Questions for Further Consideration:
The ontology of wealth: What is wealth? How to correctly define wealth? The establishment of a planetary open civilization: How to reconcile national open societies with global challenges like immigration, ecology, and international unemployment? The role of education in transforming the world: What is the role of education in creating a better world, beyond replacing capitalism and socialism?

Political Agency Problems:
George Soros acknowledges that political leaders sometimes prioritize personal interests over those of the people they represent, leading to a “clinging to power” mentality. Lifetime presidencies in non-democratic states and personal egos of leaders in democratic countries can impede common interests and hinder progress.

World Reserve Currency:
Soros disagrees with Robert Mundell’s proposal for a world reserve currency, deeming it “one step too far.” He considers the special drawing rights (SDRs), a combination of national currencies adjusted according to their relative importance, as a more feasible step toward an international reserve currency.

SDRs and Bretton Woods Reforms:
Soros advocates for further reforms to the SDRs to enhance their representativeness and appropriateness. He suggests including the renminbi, the real, and potentially other currencies to create a more comprehensive composite of national currencies. Soros believes that moving in this direction is in the best interest of the United States and would require political interest and support from both the US and Europe.

Trade Deficit: A Double-Edged Sword:
In the past, the US benefited from a trade deficit with East Asia, as it allowed the US to spend more than it earned. This situation led to the accumulation of a chronic current account deficit, which reached 6.5% of the GDP.

Structural Problems in the Dollar’s Role:
The dollar’s status as an international currency creates a built-in deficit in the system. As the world economy grows, more dollars are needed, and these dollars can only come from the US, the issuing country.

Current Consequences:
The US’s current account deficit is a heavy burden. It is in the US’s interest to move away from the dollar’s role as the international currency.

Trade Deficit Dynamics:
The trade deficit between the US and East Asia has shifted from Hong Kong and Taiwan to China due to labor changes. The difference in the impact of the trade deficit in the past and in the future is unclear.

Background:
The United States has been running a large trade deficit with East Asia, particularly with China, for an extended period. This trade imbalance has not caused significant instability or trouble in the past.

Factors Contributing to Trade Deficit:
The trade deficit between the US and East Asia started in the 1980s due to economic policies and shifts in manufacturing industries. The United States has consistently spent more than it earns, while Asian countries have accumulated wealth and savings. This symbiotic relationship has allowed the trade deficit to continue, amplified by the recent economic stimulus in the United States.

Housing Bubble and Domestic Bubbles:
The housing bubble and domestic bubbles, particularly in the United States, have led to the current instability and trouble. The unsustainable housing bubble, rather than the trade deficit, has brought the symbiotic relationship to an end.

Ethical Responsibility of Investors:
In response to a question from an audience member, George Soros emphasizes the importance of ethical responsibility for investors, particularly those in big markets. He acknowledges that profit-seeking is acceptable, but stresses that investors should prioritize truth-seeking and avoiding manipulation in their actions. Ethical investing should be a priority, especially in the aftermath of the financial crisis, to prevent future instability and trouble.

Conclusion:
The trade deficit between the US and East Asia has been driven by economic policies, manufacturing shifts, and willingness of lenders and borrowers. While this deficit could have continued indefinitely, the housing bubble and domestic bubbles have caused instability. Investors should embrace ethical responsibility, seeking truth and avoiding manipulation, alongside profit-seeking motives.

Reflexivity and Social Responsibility:
An Argentinian student raised a question about how social responsibility fits into the reflexivity theory and if it can help address issues related to agency and agents in the market.

Challenges in Connecting Reflexivity and Social Responsibility:
George Soros expressed difficulty in immediately seeing how reflexivity and social responsibility could be connected.

Discussion on Imposing Social Responsibility on Investors:
Mervyn King brought up the idea of imposing social responsibility duties on corporations and investors, prompting further discussion.

Education and Financial Market Participants:
The student suggested that social responsibility could be a tool for solving problems related to agency and agents, and that it could be spread through education.

Financial Reform and Lobbying:
Soros emphasized the need for financial reform and criticized the lobbying efforts of banks against consumer protection measures, particularly in the context of credit card usage and excessive charges.

Determinism vs. Stochastic Nature of Soros’ Reflexivity:
In response to a question about whether his reflexive open society is deterministic or stochastic, Soros clarified that it is a world of trial and error, indicating a non-deterministic approach.

Regulation and the Glass-Steagall Act:
Soros’s proposition for financial regulation was compared to the Glass-Steagall Act, which aimed to differentiate between risky and stable financial products.

Compartmentalization of Capital:
Soros advocates for internal separations of capital within financial institutions, not just between commercial and investment banking but also within specific markets, to prevent contagion and reduce systemic risks.

Shortcomings of Glass-Steagall:
Soros acknowledges the limitations of the Glass-Steagall Act, such as its strict confinement of banking to individual states, which heightened risks for banks dependent on sectors like agriculture.

Contagion and Market Collapse:
The abolition of capital segmentation led to contagion, both internationally and within markets. The subprime market collapse cascaded rapidly to other markets, including lesser-known ones like municipal bonds and auction rate securities.

Analogy to Oil Tankers:
Soros compares the need for compartmentalization to oil tankers, where buffers prevent oil from sloshing around and causing instability.

Global Recovery and Areas of Concern:
Soros notes that countries like Australia, China, and the United States are recovering, but areas of concern remain.

Liquidity and Inflation:
The recovery has been driven by unprecedented financial and fiscal stimulus. Continued stimulus may be needed in the United States to sustain the recovery, which raises concerns about potential resurgence of inflation.

Questions From Audience Members:
Challenges in Economic Policy: Balancing Inflation and Deflation Incentivizing Top Leaders in Political and Corporate Roles Role of Ordinary People in the System and Countering Manipulation Appreciation for George Soros’ Support of Mathematics and Gift of Romanian Translation of His Book

Responses From George Soros:
Importance of Ethical Behavior in Leadership Ordinary People’s Responsibility to Punish Those Who Mislead Them Exercise of Voting Rights to Discourage Deliberate Manipulation

Responses From Mervyn King:
Acknowledgment and Appreciation for Audience Questions Humorous Anecdote About Discovering the Secret to Engaging with Air France Air Hostesses

Appreciation for the Successful Lecture Series:
The speaker expresses gratitude for the successful conclusion of the George Soros lecture series, highlighting the various insights and inspiration gained throughout the week.

Audience Engagement:
The speaker acknowledges the active participation of the global audience, including those in Budapest, London, Cambridge, New York, Shanghai, and Hong Kong, who contributed to the discussions.

Diverse Topics Covered:
The lecture series covered a wide range of topics, demonstrating the depth and breadth of George Soros’s knowledge and expertise.

Theatrical Reference:
The speaker makes an interesting observation about George Soros and Howard Davies’s theatrical performances, both on stage and on the world stage.

Tribute to George Soros:
The speaker acknowledges George Soros as CEU’s most distinguished lecturer and extends an invitation to continue his role as a global superstar.

Gratitude to the Participants:
The speaker thanks the overflow audience of students in Hong Kong, the live audience in Budapest, the moderator, the commentator, and especially George Soros for his extraordinary performance.

Concluding Remarks:
The speaker concludes the lecture series with a final round of applause and appreciation for George Soros’s outstanding contribution.