George Soros (Soros Fund Management Founder) – 10 Years After the Crash (Sep 2018)

Chapters

Abstract

Lehman Brothers’ Collapse and the Financial Crisis: A Discussion with George Soros

Navigating the Financial Crisis:

This article marks the 10th anniversary of the Lehman Brothers’ collapse and the ensuing financial crisis. It features a discussion between Rob Johnson and George Soros, who reflect on the events and their implications.

TARP Legislation and Its Impact:

Following the Troubled Asset Relief Program (TARP) legislation, Soros emphasizes the need to inject capital into the banks at the equity level to recapitalize them effectively. He engages in discussions with Larry Summers, then the Director of the National Economic Council, advocating for this approach. However, Summers resists, citing concerns about nationalizing the banks.

TARP Legislation: A Point of Contention:

Soros and Johnson expressed concerns about the initial design of the Troubled Asset Relief Program (TARP) proposed by Treasury Secretary Paulson. They believed that TARP prioritized taking over banks’ bad debts rather than injecting capital into their equity, which would have been more effective in recapitalizing the banks and stabilizing the economy.

Equity Injection: A Missed Opportunity:

Soros and Johnson argued that injecting money into banks’ equity, rather than their balance sheets, would have provided more significant leverage. With a leverage ratio of 20 to 1, $800 billion invested in equity could have adequately addressed the banking crisis, relieved mortgage holders, and corrected economic imbalances.

Barney Frank’s Crucial Response:

Inspired by Soros and Johnson’s discussions, Congressman Jim Moran and Chairman Barney Frank raised questions about whether injecting money at the equity level aligned with the legislation’s spirit. Frank’s affirmative response opened the way for using TARP funds to support banks’ equity, allowing Paulson to eventually invoke this approach.

Compulsory Capital Allocation: A Stigmatizing Move:

Paulson’s approach differed from the British authorities’ strategy, which encouraged banks to raise equity voluntarily with government assistance as a backup. By forcing banks to accept a predetermined amount of capital, Paulson stigmatized them and created a negative perception among the public.

British Bailouts: A Different Approach:

The British government, under Gordon Brown, adopted a more market-oriented approach to bailouts. Banks were required to raise equity, with government assistance available only as a last resort. This strategy allowed some banks, such as Royal Bank of Scotland and Lloyd’s, to raise capital without resorting to government assistance, avoiding the stigma associated with forced capital injections.

The European Debt Crisis and Its Roots:

The conversation shifts to the European debt crisis, which Soros attributes to structural flaws in the eurozone’s design. The Maastricht Treaty, which established the common currency, lacked a common treasury and a common banking union, leading to a situation where countries were responsible for their own banks’ failures.

Missed Opportunities and Political Consequences:

Soros highlights the missed opportunity for Europe to create a common treasury during the crisis, which could have mitigated the burden on individual countries like Ireland. This failure had significant political consequences, leading to the rise of tensions and the emergence of movements like the Tea Party and Occupy Wall Street.

Addressing the Mortgage Overhang:

The discussion touches upon the issue of mortgage relief for homeowners struggling with underwater mortgages. Soros acknowledges the challenges in providing such relief due to the complexity of mortgage-backed securities. He expresses regret that efforts to find a solution were ultimately abandoned.

The Political Fallout: From Bailouts to Electoral Shifts:

The political fallout from the financial crisis and its aftermath is examined. The bailouts and perceived lack of support for ordinary citizens fueled resentment, leading to the rise of the Tea Party and the electoral victories of the Republican Party. Soros emphasizes the significance of the Tea Party, which drew support from small business owners affected by the crisis and evangelical Christians backed by wealthy donors with vested interests.

The Evolving Political Landscape:

The discussion concludes with a reflection on the political landscape shaped by the financial crisis. Soros underscores the importance of understanding the diverse components of movements like the Tea Party and the role of financial support in shaping political outcomes.

The Rise of the Tea Party and INET’s Inception:

The Tea Party’s Influence:

The political landscape shifted to Republican control, largely due to the efforts of the Tea Party and the financial support of the Koch brothers. The Tea Party’s influence was prominent during the TARP debate, where concerns arose about the potential consequences of the financial crisis.

The Creation of INET:

Soros and Johnson discussed the need for a response to the failures of the economics and financial economics profession. A fact-finding mission led to a gathering of 30 economists in Bedford, New York, to address the failures of experts. This meeting served as the foundation for the Institute for New Economic Thinking (INET).

INET’s Achievements:

INET has made significant contributions to changing the economics profession and influencing policy. Soros compares his role in INET to that of the Koch brothers in the Tea Party, but with different motivations.

The Shift Towards Authoritarian Regimes:

The Decline of Open Society:

Soros expresses concern about the global decline of open societies and the rise of authoritarian regimes. He distinguishes between open societies, where elected leaders protect freedom, and closed societies, where rulers use power to maintain control and enrich themselves.

Technological Threats to Open Society:

Soros highlights the unprecedented threat posed by artificial intelligence (AI) and big tech monopolies to open society. AI techniques facilitate control over individual behavior, while big tech monopolies consolidate power. The combination of these factors requires careful attention and control.

The Challenges Ahead:

Soros emphasized the need to address the combined threats of AI and big tech monopolies, which require innovative solutions to preserve open societies.

Xi Jinping’s Threat to Open Society:

Threats to Open Society:

Xi Jinping’s rise in China poses a significant threat to open society, as he employs technological advancements to tighten control over the Chinese people.

Resistance within China:

Despite Xi Jinping’s authoritarian rule, there is significant resistance among the Chinese people, as evidenced by Xi’s rebuff at the Baidu conference and the tradition of advisers voicing opposition to the emperor.

Importance of Supporting Chinese Resistance:

Since democracy cannot be imposed externally, it is crucial to find ways to support the Chinese people’s resistance against Xi Jinping’s regime.

Global Challenges to Open Society and Potential Signs of Change:

Global Challenges and Ominous Times:

The world has witnessed turmoil in Europe, an unresolved eurozone, a rise in authoritarianism in Europe, and China’s growing influence, leading to a challenging and ominous time.

Open Society Under Siege:

Open society is under attack and facing difficulties in protecting its achievements, with things going wrong up to this point.

Potential Turnaround and Change:

There is hope for a change in the U.S. midterm elections in November, with the Democrats potentially winning both houses of Congress.

Positive Impact on Europe:

A change in the U.S. could have a positive impact on Europe by countering the rise of authoritarian leaders like Orban, Salvini, and Bannon, who oppose the values of the European Union.

Continued Support for Open Society:

Continued support for organizations like INET and Open Society is essential in promoting constructive change and upholding the values of open society worldwide.

Notes by: crash_function