Soros warns global boom is over
By Steve Schifferes
BBC News, 19 May 2008
http://news.bbc.co.uk/1/hi/business/7408620.stm
Billionaire investor George Soros has given his gloomiest *****sment of
the state of the US and world economies.
He told BBC business editor Robert Peston that the "acute phase" of the
credit crunch may be over but effects on the real economy are yet to be
felt.
He warned the "financial bubble" of the last 25 years could be drawing
to an end and the post World War II "super-boom" era could also be over.
He predicted a "more severe and longer" US slowdown than most people
expect.
And he said that the UK was worse-placed than America to weather to
coming economic storm, because it had such a large financial sector and
has had the biggest increase in house prices.
Gloomy bankers
Mr Soros said that the current mandate of most of the world's leading
central banks - where their main focus was fighting inflation - meant
there was limited scope for cutting interest rates to help economies
recover.
As for the Bank of the England, he said, "it was like a Greek tragedy",
because they "couldn't do a U-turn" until there was a full-blown
recession, which would finally take away the price pressures.
It was "inevitable" that they would keep rates too high for the good of
the economy, he added.
In part, Mr Soros is echoing the gloomy forecast of the world's central
bankers in recent weeks.
The head of the European Central Bank, Jean-Claude Trichet, recently
told the BBC that the "market correction was still on-going".
Mervyn King, the governor of the Bank of England, warned in the Bank's
inflation re****t that UK inflation would rise above its target while the
economy would slow sharply.
Moral hazard
Mr Soros believes that central bankers are partly to blame for the
credit crunch because of their past behaviour in bailing out the
financial sector whenever it got into trouble for over-lending, the
so-called moral hazard problem.
He said that the central banks should explicitly target asset bubbles
such as housing booms and try to stop them getting out of control, which
is something they have resisted doing so far.
And he said that tougher but smarter regulation would be needed in the
future in order to reduce the excess supply of credit in the economy.
These could include measures to force banks to put aside more reserves
in good times to help cu****on them in bad times.
Misguided markets
Mr Soros believes that oil and other commodities are over-priced, but he
sees little chance of the price of oil coming down until there is a big
slowdown in the richer economies.
He sees the price of oil as being driven by higher demand in developing
countries such as China, where subsidised energy costs mean there is
less price-sensitivity.
He also said that stock markets are still underestimating the severity
and length of the economic downturn, especially in the US, and are now
having a "bear market rally".
Profiting from the crisis
Mr Soros has credibility partly because he is prepared to invest his own
money to back up his convictions.
The private investment fund he has resumed managing made a return of 34%
last year betting that the credit crunch was more severe than many
people expected.
Mr Soros was the man re****ted to have made $1bn in September 1992,
betting correctly that the British currency would have to be devalued
and leave the European Exchange Rate Mechanism.
Mr Soros has devoted much of time since then to philanthropy, especially
in Eastern Europe.
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