Newsweek International, February 1, 1999

The Story's Not Over

George Soros argues for an international central bank and tougher treatment for imprudent lenders—and says what it's like to be called an evil speculator

Much of the financial world is breathing easier these days. Not George Soros, who sat down with NEWSWEEK late last year, and again last week, to explain why the world financial system still needs radical change. The trader who's been called "the man who broke the Bank of England"—and plenty worse—also reflected on his own role. Edited excerpts:

NEWSWEEK: When Brazil devalued recently, the world stayed calm. A lot of people concluded that the financial crisis is over. Do you agree?
SOROS: I think the Brazilian crisis was foreseen by all market participants. And therefore it has not found anybody unprepared, so you don't have the same kind of shock. Nor do you have the same kind of contagion—because there are not many countries to fall. So in that sense, the disturbance has run its course. However, I think that the problems that have been raised by these events are not solved. We are not yet at the end of the story. And I think it is more urgent than ever that we fix the international financial system.

In December the IMF announced a $41 billion stabilization package for Brazil. Did it accomplish anything? And what does it tell us about the various plans for fixing the system?
The IMF would argue that they gained valuable time. I think it's a fair point. But this brings us back to my point that the IMF is now a part of the problem and not part of the solution. Its mission is to preserve the international financial system, and its policies are designed to enable the country that's in trouble to service its international obligations. Therefore, it always advocates high interest rates, pushing the country into recession. It's the IMF that has pushed Brazil to raise interest rates, and it's not the right policy.

So, how could that be changed? I think you have to take two steps. One is to change the position of the IMF with regard to countries where the lenders were imprudent. Impose conditions on the lenders, as well as on the borrowers, to eliminate this moral-hazard situation. On the other hand, the IMF ought to be in a position of acting as lender of last resort with regard to those countries that are following sound policies. It doesn't have the resources at present, but it has to take on more of the role of an international central bank. Now, the trouble is that the IMF is in the doghouse, and that it's more likely to be punished than rewarded by being given additional powers. And so that is a problem which will leave leaders without an international body for keeping the financial markets from going to excesses. And so I think we are in extremely treacherous territory now.

How can this new institution be created?
I think governments basically need to recognize the need for it—and this includes both the haves and the ones who stand to benefit. It really has to be an architecture that is agreed and acceptable both to the center and the periphery. There is a recognition in the center countries that something is woefully wrong and needs to be fixed. I think there is a lot of sympathy for this even in the banking community, as long as it doesn't impinge on their fun. Interestingly, it's the countries that potentially would benefit from [a new architecture] that are not giving the matter any serious thought—Brazil, Korea, Thailand and so on—because they don't want to rock the boat. They want to put forward an image of being loyal and trustworthy partners of the IMF.

You seem to disagree with the academic justification for speculators—that they tend to bring the market back into equilibrium. Yet this is something you spent your life doing. If you agreed with the academics, you could justify it as being socially useful. If you agree with yourself, it's hard to see how you justify doing what you do.
Well, I do it for profit. I don't do it for the greater good. I write the book for the greater good. I separate being a competitor and being a maker of the rules, and advocate, actually, changing the rules, because I think that financial markets, particularly the global markets, need greater supervision. And you have to put limits on the use of credit, because one of the major sources of instability is in the use of leverage. I've been arguing this for some time, you know.

Now there is an unfortunate confusion regarding the hedge funds, because hedge funds cover a multitude of sins. For instance, our hedge fund has absolutely nothing to do with the operations of LTCM [Long-Term Capital Management]. It's a totally different kind of operation. [But] since the ways of markets are mysterious, hedge funds are easily picked out as a devil, and I, personally, have the privilege of playing the role of the devil.

I think that hedge funds should be regulated, just like any other market participant should be. Now, since hedge funds are offshore, they're more difficult to regulate, but I don't think it's at all impossible if the national authorities cooperate with each other.

Talk a little bit about the experience of being personally demonized, along with hedge funds.
You know, actually, it doesn't bother me that much. The only way to counteract it is to try to be open and to engage in dialogue and try to explain how markets work. But, you know, I guess I'm not usually there when I'm being burned in effigy, so it doesn't touch me personally.

An Excerpt from THE CRISIS OF GLOBAL CAPITALISM

Newsweek International, February 1, 1999

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