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George Soros is a legend in the world of investment management. When he moves money, the markets

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react. When he speaks, the world listens. He's also made an impact through a network

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of foundations dedicated to global economic and political improvements. He is the chairman

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of Soros Fund Management and the author of The Crisis of Global Capitalism, Open Society

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Endangered. I am pleased to have him on this program for a continuation of a series of

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conferences we've had since I've been doing this program about the nature of the economy,

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capitalism, and how he sees the future. Welcome back.

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Nice to be here.

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Tell me about how, I mean, the origin of the book, because you have before laid out for

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me and others your own philosophical base in an open society.

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Right.

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Start with me by talking about the open society, in a sense, as a foundation, and where you have

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gone in your concerns about the economic crisis we face as we speak.

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Well, I started out with a framework that I really developed as a student when I was

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influenced by Karl Popper, Open Society and its Enemies, the totalitarian systems that impose

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themselves on the people by force in order to get their ideology accepted. And he counterposed

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to that the concept of an open society where it is recognized that nobody has a monopoly of

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the truth, that we are, that all views are, that we may be wrong. And therefore, we need

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a government that we are ready to replace, a democratic government, a market economy, critical thinking.

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So that was my concept of open and closed society. And of course, coming from Hungary, where I lived

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through the Nazi regime and the communist regime, I was obviously in favor of open society.

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And I set up a foundation to foster open societies. Our goal was to help open up closed societies and make

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open societies more viable because open societies have deficiencies as well and foster a critical

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mood of thinking. Then, as the communist regime started to collapse, I got sucked into a revolutionary transition and

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I ended up setting up foundations in some 30 countries. And they did a lot of good, I think, just by allowing,

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empowering people who had a concept of an open society to move towards it. I don't have a definition of

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what an open society is. An open society has to define itself. So I let the people in the countries define themselves.

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And then this framework didn't really work quite as I expected because the collapse of a closed society did

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not lead to the creation of an open society. There was something missing. And I began to realize that

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that open society is threatened not only by a totalitarian regime, but also by an excessive reliance on

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market values. That there has to be something else to hold a society together.

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What caused you to come to the conclusion that there was serious danger, I mean, in, quote,

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runaway capitalism. Was it the economic crisis that you saw spring out of Asia and then spread

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to Russia and then threaten Latin America? No, no, because, because I started writing about it.

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I wrote an article in Atlantic Monthly in the beginning of 97. And I started writing the book when I

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got a lot of reaction to that article. And a lot of, and the article was actually widely misunderstood

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because of the title capitalist threat. So I'm, I'm not opposed to capitalism. I want to improve it to

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make it more viable. So open society is sort of a, a middle ground, which, which is not, uh, neither the,

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this, uh, uh, what I call market fundamentalism, uh, nor, uh, uh, let's say communism or socialism

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or nationalism. It's, it's, it's the recognition that all our systems are, are, are flawed. All our

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concepts are flawed. Then we must remain open, uh, to improvement. So there is an excessive belief now

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in, uh, uh, the role of markets. Uh, and this, it's been carried, uh, to an extreme, which I think

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endangers our society. It endangers it because, first of all, markets, particularly the financial

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markets are unstable. Uh, but if the central core of, of, of what you fear about markets is the

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instability of the financial market. Right. Well, that is something that I know about and I'm on pretty

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firm ground. Right. So there I have a, I think a pretty strong. And used to your advantage. Yes.

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Uh, that, I mean, that's my profession. Exactly. Uh, so, uh, so I think there I feel on firm grounds. Uh,

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then I, uh, but I'm also concerned about the relationship between market values and let's say

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human values or intrinsic values. And there's something, uh, I think wrong if you allow market

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values to enter into spheres of our society where it doesn't properly belong.

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Well, you once said you'd rather be known as someone who's contributed something to philosophy

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than someone who had contributed, uh, nothing but the making of a lot of money. Right. And building

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up your own economic resources. Yes. Yes. Uh, staying with this idea of where you began to realize

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that capitalism had peril within it. Yes. Uh, in stable, unstable markets and the like. That came before

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the global economic crisis that we still witness. Very much so. Yes. Why, why then though? I mean,

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what was it that said to you before everybody else thought things could go wrong? Because I have a

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theory of markets, which is, let's say, different from the prevailing, uh, wisdom. Because prevailing

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wisdom is that markets tend towards equilibrium, which is true when markets deal with known quantities.

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But financial markets deal with not only unknown quantities, but actually unknowable quantities.

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Because the quantities that it deals with, uh, namely the future values, depend on how financial markets

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appraise them at, at present. So, uh, what financial markets do today has an impact on the economy, uh, tomorrow.

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So, so, so the concept of equilibrium is really not appropriate. Uh, I, I, I use the concept of

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reflexivity, which recognizes that there is this two-way connection, that markets don't just reflect,

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they also affect. And that doesn't necessarily lead to equilibrium. In fact, it can lead you quite

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far from equilibrium. Let me talk about the ideas that you raised here, and you began to think about,

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uh, before the economic crisis, but, but move ahead to the economic crisis. What, how did capitalism and

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unstable markets contribute to play a part in the economic crisis that we've seen sweep, as I said,

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from Asia to Russia to Latin America? Well, you had a, a, a variety of factors at play, uh, and different

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factors affected different countries. But none of the factors was present in all the countries. What

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was present was the free flow of, of, of capital, which is inherently unstable, uh, and tends towards

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boom bust. So that the, the bust was preceded by a tremendous boom. And the, since markets are unstable,

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we do have, uh, uh, monetary authorities, uh, that try to preserve stability. And we have, uh, you know,

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central banks in each country, and so on. We also have the International Monetary Fund, uh, and the

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regulatory system that, uh, that applies actually, uh, exacerbated the, uh, the, the problem.

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The regulatory system? The, the, uh, intervention by the International Monetary Fund and the Monetary

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authorities. Sure. What does this crisis say to you

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needs to be done? What does the threat that you saw from capitalism cause to be done? In other words,

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said better, what's, should we do and what's your solution? Uh, uh, we need to, uh, to recognize how the

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system works and, uh, and re, uh, reshape the, uh, mechanism for controlling the excesses. I think

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that the mission of the, of the International Monetary Fund, uh, has to be reconsidered. We need

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something like a, a new Bretton Woods for a, a world which is characterized by the free flow of capital,

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because the Bretton Woods was designed for a very different, uh, world. Now, before we have such a new

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Bretton Woods, we actually have to, uh, come to terms and, and, and, uh, with the situation and, uh, develop

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a, a, uh, some concept as to what the new system should work, uh, should look like. And that's what I

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try to do, uh, uh, in the book. But, uh, I will be the first one to admit that, uh, that, uh, I would

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say that, uh, I'm stronger on the analysis than I am on the solution. Okay, but how do you dampen the

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flow of capital that rushes crazily towards economic opportunity? Well, uh, what I have in mind is that

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when the flow of capital is turned off, then there is not enough. If you then provide, uh, some of,

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some official, uh, guarantees which allow the countries in need to, to access the market, then

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by withdrawing that support, you give a signal to the market that it is getting overheated. So it's by

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injecting money when, when it's not available, then you can, you have something to withdraw,

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which then gives a signal that, uh, uh, things are getting overheated. And then when, if there is a,

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uh, uh, a bust, you then, uh, uh, demand, uh, or, or, or allow the countries concerned to impose

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conditions on the lenders as well as, uh, uh, having to, uh, undergo some, uh, severe restrictions

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themselves. So you, you, you, you, you spread the, uh, the burden of the adjustment between lenders

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and borrowers. Uh, this is, this is incidentally what really should have been done in this crisis,

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because some countries have over borrowed. They had too much debt, uh, and not enough equity,

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for instance, Korea or Thailand. Now, actually lending them more money, uh, uh, uh, can't get

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you out of the trouble. You need to, uh, you need to, uh, change the relationship of equity and debt.

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So, uh, you really would have had to have some kind of a moratorium and some debt equity reorganization.

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It is happening now. Uh, let's say Korea has, has just moved in that direction, but it's one year

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after the, uh, the crisis. And so the, in the meantime, the economy has, uh, plunged into, uh, uh,

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severe recession. Uh, I think an earlier move would have abated this, uh, problem.

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World Bank has been critical of the IMF. Do you share that criticism?

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Uh, uh, yes, I, I think, but I, I also have a lot of, first of all, a lot of respect for the IMF,

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and a lot of understanding for their position, because their mission is, for their first task,

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is to preserve the financial system. So they want to make sure that the debtor countries,

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or the, uh, can, uh, meet their obligations, because if they defaulted, as they, as in the end,

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Russia did, it can disrupt the whole system. So they, since that is their concern,

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they want to stabilize the currency, because if the currency falls too much, then the debt,

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denominated, denominated in dollars becomes overwhelming. And they want to actually have

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the country go into a recession, so that it gets a, it, uh, has a trade surplus, which allows it to,

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to pay the debt. So they are confined by their mission, they do the right thing. But the effect

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is they raise interest rates to a punitive level, which then has a very negative effect on the economy.

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Whereas what, for instance, the Federal Reserve has done, when the crisis looked like it was

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beginning to impinge on our markets, immediately lowered interest rates, and lo and behold,

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we seem to be breathing easier. Do you believe that today, as we speak, um, before Christmas 1998,

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that the crisis is under control, and the worst is behind us?

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I think that the panic phase is behind us. You know, there was the, this wrecking ball that, uh,

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traveled around the world. The notion that it would somehow overwhelm us like a tidal wave.

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Right. That has been calm. That, I think, has definitely been calm. What we are now, uh,

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suffering from is the after effects, uh, the, the effect of the financial markets on the real economies.

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So you have a third of the world in, in, uh, severe recession. You'll probably have some more,

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because Brazil has yet to enter into a recession. But it's certain to?

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Brazil. Yes, but it's likely to. It's, it's, it's, uh, destined to, because the program calls for it.

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Right. What do you mean the program calls for it? The IMF program calls for it. Okay.

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I mean the, even the government, uh, because this is actually, uh, a program designed by the government,

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uh, the Brazilian government. Uh, so, uh, you, you have already the, uh, and you have a, generally,

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a deflationary environment in the world today, because there's overcapacity, uh, demand is, of course,

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at the, at, at the low, uh, level, uh, and companies, uh, have to sell in order to generate, uh, positive

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cashflow in order to pay their debt. So now there's very little pricing power, uh, profits are under, uh, pressure, uh,

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investment demand is liable to decline since there is overcapacity. Uh, so,

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uh, it is, it is possible, although less likely today than it was two months ago, that the whole

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world economy slips into a recession. Let me come to the, the issue of where is, is a recession coming

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to the United States in your judgment? Uh, uh, it, uh, it's, it's, it's, uh, there will be a slowdown

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in the growth. Whether we go into a recession, I think, depends a great deal on what the market does,

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actually. Uh, if you had a, uh, a significant decline in the market, the stock market, you, you,

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it's more likely, it's likely to create a recession because, uh, um, our consumption now has become

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very much dependent on the, the capital gains that people make in the stock market. So instead of markets

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reflecting, uh, you know, uh, economic conditions, they are causing it. So, uh, uh, having lowered

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interest rates, uh, uh, uh, uh, maybe the market won't go down very much, in which case we may have a

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slowdown without a recession. Can you have a slowdown in the economic growth of a country

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and at the same time have its markets keep going up? Yes. I think, I think, I think,

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because it is something healthy about keeping the economic growth under control, uh, or within,

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or, or in a sense. Well, when you have less, less demand for money for investments, but you have,

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uh, uh, uh, an easing of the supply of money, then a lot of that money finds its way into the stock market,

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which, which leads to, uh, uh, to, um, the increase in, in, in, in, uh, uh, in the values of stocks,

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might be, uh, excessive speculation in certain areas, which then you'll have to pay for later.

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But in the meantime, I think it's more likely to push prices up than down. And so you think the

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market is going to do what? Well, I personally think, uh, this, but this is really just a, a, a,

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a sort of a, a balance judgment, which, which, uh, uh, uh, I'm ready to devise as, uh, as events unfold.

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Uh, I, I think we are in a bear market actually, because of the pressure on, on, uh, on margins,

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uh, and, and, uh, and, uh, let's say the, um, the decline in investments that I expect to come.

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So therefore, if you were an investor, large or small, you eat, you ought to either sell short or

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get out of the market and find other avenues to invest your money. I wouldn't, I wouldn't,

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I wouldn't like to, I wouldn't like to go that far because, uh, actually in the final phases of a,

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of a bull market, sometimes the biggest profits are made. The final phases of a bull market.

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Yeah. And people who leave too early find themselves, uh, in great remorse later. Right.

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Have you, final question, have you yet done what you most want to be remembered for?

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Uh, apart from family, have you done with your personal life, have you achieved yet what you most

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want to be remembered for? I think so. And I think, and I think the book has a lot to do with it,

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because I actually want, uh, this is the book I always wanted to write and, and, and, and have,

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have it actually read. So I, I think, uh, I got there. Now, it's not the end of the road,

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because as I said, I think I'm better on the analysis than I am on the solution.

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So I think, uh, I'll have to keep on working on, on, uh, trying to refine, uh, the solution.

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The crisis of global capitalism, George Soros. It's a pleasure to have you,

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as always. Thank you, George. Thank you.

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Thank you for joining us. See you next time.