George Soros

Schechter: In Switzerland at the World Economics Forum, in your remarks there, you spoke about financial collapse in Asia as being scary -- indicating that the situation, the volatility is much riskier than other people seem to feel. Why do you think it's scary?

Soros: Well you see what is scary about the Asian crisis, is not that it arose because it was predictable and that we even expected some of the events that occurred. But the repercussions, the way one thing led to another -- it was the magnitude of the crisis and the extent of the crisis -- that surprised practically everyone. The financial markets are supposed to work like a pendulum -- sort of swinging -- there's an exogenous shock and then it swings one way, then it sort of eventually settles and reaches equilibrium. And instead of that it worked like a wrecking ball, knocking over one economy after another. And that was very scary.

Soros: Yes, I work with the theory that financial markets are inherently unstable and to prevent excesses you need some kind of intervention -- supervision, regulation. Unfortunately, the prevailing idea is that markets tend towards equilibrium. And so we work with a false concept of how financial markets operate.

Soros: Well there is a great advantage in that because controls have their own problems. In fact markets are much more efficient than centralized controls but it doesn't mean that there should be absolutely no control. In fact if you look at reality ever since you've had capitalism and ever since you've had financial markets, you have had crises and each time there was a crises there was something done to prevent a re-occurrence. So this is how central banking came into existence. This is how the Securities and Exchange Commission was set up. The national markets, the markets in the United States are actually supervised--there are institutions whose job it is to provide stability-- The Federal Reserve and so on. Now the markets have become globalized but there is no global supervisory authority. In fact, even that almost exists because the international monetary fund fulfills partially this goal. The Bank for International Settlement set up guidelines for bank capital requirements. That's also international regulation. The G-7 talks about it. You know there's the national monetary authorities are in constant contact about it. So there is the beginnings of regulation. But it's not really accepted as necessary and there's a strong body of opinion that argues that it's not necessary at all.

Soros: Yes, it's very clear the Asian crisis has clearly demonstrated weaknesses in the system. And they need to be addressed.

Soros: Well, I break it down into two parts: One, the imperfection of the market mechanism--And the second, the excessive demands or the excessive power given to the markets because there are other needs in society which cannot be fulfilled by the market and those needs are neglected. So there is some market failure but much greater social failure. In fact the failure of the political process, so there's a much bigger--in my opinion--much bigger political problem that there is a financial market problem.

Soros: Well that remains an issue.

Soros: Well, the Asian crisis has shown how important what how important the internal political situation in a country is -- there was this Asian model which was basically an authoritarian model even though it had some trimmings of democracy. That model showed its weaknesses because there's not enough transparency, not enough information -- there's cronyism and so on -- those are important factors in a crisis so actually the Asian crisis, the Asian model has failed. So it's now in increasingly clear that it's important to have a government that is responsive to the needs of the people, that that the democratic institutions should be established, that there should be an independent press, independent media so that the questions can be asked. So actually the Asian crisis was a clear demonstration of the importance of democracy and human rights-- mainly of democracy, actually, in this context but of course the abuse of human rights comes because of the suppression of democratic rights.

Soros: We are going to link and I think when the lessons of the crisis are learned I think there have been increasing awareness of political conditions in the countries concerned. And already the big conflict in Indonesia was over that because the IMF is going to insist on structural changes. The structural changes are not human rights as such. But indirectly they have an impact on human rights.

Soros: Well you see human rights means to be needs to be -- it's too general that of course, democracy is also a very general term. But clearly the internal conditions, the internal political and social conditions are very important for good functioning of the system and this has become clear. And, and the countries which during the crisis have moved toward democracy, like Korea, and Thailand. You see they were democracies before except that their governments were not let’s say observing the conditions of what I call, "The Open Society." So there were elections because after all this is elections that brought about the change but it's a different kind of government -- one that is more responsive to the public. So that is, that is happening now.

Soros: Well, you have to recognize that globalization brings great benefits but it has deficiencies. One is the difference in the position of those who are a dissenter of the system and those who are on the periphery and basically those who at the center are providers of capital and those at the periphery are receivers of capital. And the system is definitely designed to favor the providers of capital to the detriment of the receivers. But the receivers also receive benefit because they get capital, which they very badly need. But particularly when you have a crisis the system is currently stacked in favor of the lenders -- to the detriment of the debtors.

Soros: Well, the crisis has really hurt the workers and they are -- they didn't have the benefit let's say -- of -- or they are not responsible for the catastrophe that has befallen them, the social dislocations in Asia are tremendous because these countries don't have social safety nets. So if people lose their jobs they have nothing to fall back on. A lot of people lose their jobs so you have a lot of economic refugees, boatloads of people in Indonesia trying to find a job in Malaysia -- and of course the Malaysians arrest them and send them back. So the human costs are tremendous. And you've had great advances in the last 15, 20 years. But a lot of people have been brought into the market system and now they're-suddenly suffering from the breakdown of that system. Now in Thailand you still have, let's say people still have roots in the subsistence economy. If they lose their job in the city they can perhaps go home and get some food. In Korea this is much less the case. Indonesia is also in terrible shape. So the Asian crisis has created tremendous human suffering when as it happened it didn't affect the advanced countries. In fact, in a funny way it actually was to their benefit. So with our Spartan upbringing we can take other people's pain without flinching and that is what is happening now in Asia.

Soros: Yes. Yes. Yes.

Soros: The capitalist threat is that the system is unstable, liable to breakdown. That's one threat. And second, the system is very powerful. It's extremely successful. And due to its success it penetrates into areas of life -- of society where it doesn't really belong.

Soros: Well, the Switzerland meeting is an enormous sort-of cocktail party -- lot of contacts -- people meet and so on -- a lot of things are discussed-- it's actually very convenient because you can meet a lot of people who you want to meet in a confined period of time. And it's also a media event.

Soros: It is actually symptomatic of the age because you have -- Presidents and Prime Ministers courting the financiers and industrialists. So it does show a shift in the relative power but I don't want to convey-- You see I don't believe that business can in any way replace the power of the state because it's a different kind of power. The sovereignty is still in the hands of the state. That hasn't changed.

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