By: Mike Campbell
Speaking at a luncheon at the World Economic Forum which is underway in Davos, Switzerland, George Soros seemed to endorse President Obama’s view that banks must not be allowed to be too big to be permitted to fail. Soros, who was widely credited with forcing Sterling out of the European Exchange Rate mechanism in 1992 (making over $1bn in the process), agreed that the retail and investment arms of major banks ought to be split. However, in his view, even after such a divorce, some of the remnants would still be too significant to be allowed to fail. He advocated international accords to limit the amount of funds that banks can leverage (i.e. the funds that a bank can borrow to invest), but pointed out that without such an international agreement, that capital would simply shift to the least regulated jurisdiction. If the major economies fell into line, Soros is confident they would be able to exert enough control to prevent rouge states from circumventing the agreement.
The current financial crisis, in his view, had easy credit and highly-leveraged deals at the core and was probably 25 years in the making. It was built on the demise of many market bubbles. Coupled with what he styled as the “misconception” that the markets are efficient and must be lightly regulated, each time a small bubble burst the governments and regulators stored up future troubles by cutting interest rates – making money even cheaper. Eventually, the sub-prime crisis turned out to be the straw that broke the camel’s back - in spectacular fashion.
Mr Soros is a widely respected investor and is a well known philanthropist who is known to have donated billions of Dollars to the causes he supports.
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