Is high finance nobler than betting on horses?
George Soros says investors are not responsible for the action of corporations
It’s like a Greek tragedy,” says George Soros. “You can see the trouble coming, and you can’t avoid it.”
Welcome to global economic meltdown. Petrol prices are shooting up, staple foods cost a small fortune. Just going to the shop at all, these days, seems to require an overdraft extension – or would, if you could find a bank still willing to lend money. But Soros, the Hungarian-born speculator, whose name causes central banks and governments to tremble, seems to be enjoying what he calls the worst financial crisis since the Great Depression.
After all, it confirms what he’s been saying for years. What’s more he was smart enough, as the house of cards collapsed last year, to make nearly $3bn for his own investment fund while others went belly up. Now, to be sure we know how clever he is, he has has rushed out a book which tells us that mainstream economics is fundamentally flawed – and we’re doomed.
“I think it’s going to be pretty bad,” he says, and I’m dismayed to note a smile playing round his lips.
“You have a housing bubble in the UK; household debts are higher than in the US. The banking and financial industry is much bigger as a proportion of the economy in this country, and that’s been badly affected. People are losing their jobs. “Also, taxation of foreigners has come at the wrong time, so there is a small exodus. You face higher prices for food and energy, and the budget allows little room for fiscal growth.”
Is there any hope? “The decline is likely to be more gradual than in the US, but longer-term.”
He’s still smiling.
“I don’t think the government is going to be able to prevent the trouble,” he continues. “And I don’t think it matters which party is in charge.” But the Bank of England could have handled things better, he feels. “It was doctrinaire and orthodox in its management of the credit crisis. They bought into the idea that markets can correct their own excesses. Marvin, er, Mervyn King was quite inflexible, and then he suddenly had to make a U-turn over Northern Rock.”
Aged 78, the man who famously “broke the Bank of England” on Black Wednesday – forcing Britain out of the Exchange Rate Mechanism and dealing a fatal blow to John Major’s government – has watery eyes and wears a hearing aid. He says at one point that he hopes to write more “if he has time” – by which he means, if he lives long enough. Despite a twice weekly game of tennis, and a blossoming relationship with a violinist who is easy on the eye and very considerably younger than him, the general impression is of a man past his peak. But he still keeps a keen eye on the world economy, and was quicker than most to suggest the sub-prime housing bubble might pull both the US and British economies down in its wake.
“The period of the US consumer acting as the motor of the global economy has come to an end,” he tells me, with finality.
But Soros’s Cassandra-like predictions aren’t always right. In 2001 he acknowledged making a mistake predicting serious calamity in an earlier book, The Crisis of Global Capitalism. “I got a bit carried away,” he admitted.
Is he wrong again? Surely, the US won’t allow the dollar to lose its special status? “There’s not much they can do.”
So which currency does Soros believe will take the dollar’s place?
“No other currency is sufficiently attractive. They’re all overpriced. So there’s a general flight from investing in currencies to commodities – and that partly accounts for the explosion in the price of oil and food.”
So one reason we’re in difficulties, he seems to be saying, is the sheer range of currencies used for trade. Does that mean we need a new approach? Should we, for example, revisit the economist John Maynard Keynes’s proposal just after World War 2 for a special currency for international trade – he called it the bancor – which would not be issued by any single country? (At the time, the US overruled this, and insisted on the supremacy of the dollar). Soros nods. “I would welcome something like the bancor – it could come to that. The existing system is – I don’t want to say it’s breaking down, but it’s pretty creaky. We’re in a period of great uncertainty. Eventually, the system is going to need to be reformed.”
The irony, of course, is that the man proposing some new kind of international currency unattached to any particular country is the same super-speculator who has made billions by betting on national currencies.
Born in Hungary in 1930, Soros was the son of the Jewish writer Teodoro Schwartz (he changed his name to Soros in response to rising anti-semitism), who was a passionate exponent of the international language, Esperanto. George Soros was taught the language from birth, making him one of a small handful of native Esperanto speakers.
It occurs to me that perhaps this early immersion in Esperanto explains his interest in the bancor – an international means of exchange which, alas, has little prospect of being widely adopted.
Having survived the brief period of direct Nazi rule in Hungary, he escaped the incoming Communist regime by travelling west (to an Esperanto conference, so it had its use after all). He was 17 when he came to London, where he studied at the London School of Economics before landing a job with the merchant bank Singer & Friedlander; and in the 1950s, he moved to New York. By the seventies, he had set up his own investment fund, Quantum, and Soros Fund Management, both of which returned enormous sums on investment. Last year alone, Soros is estimated by Institutional Investor Magazine to have made $2.9bn for himself.
In his other career, as a philanthropist, he has given away several billion dollars to a variety of causes through his Open Society Institute. Unusually, for a speculator-cum-philanthropist, he is fearless about getting involved in political matters. Decades ago, he smuggled photocopiers into Hungary to get round the censorship of the communist regime, and he was one of the first westerners to give money to the Polish dissident group, Solidarity.
At the last American presidential election, Soros openly opposed the re-election of George Bush, and spent money trying to prevent it. “I felt that Bush was violating the values that America stands for,” he says. This time round, he’s spending less but was one of the first to endorse Barack Obama.
At the moment, he is absorbed by the problems in Burma. “Nearly two million people have been hit by the cyclone and there is no way to get help to them. I feel pretty bad about that. I have had a Burma project for more than 10 years, and it’s a tremendous source of frustration.” Unwilling to admit defeat, he’s currently smuggling aid into the country for clandestine distribution through certain civil-society groups.
I ask him if he spends any of his billions on rich men’s toys – such as the painting by Francis Bacon which was bought by Roman Abramovich for $86.3m last week. “No, I have a much better use for the money. With that, I could educate 10,000 people.”
Nor does Soros own a plane, or collect unusual, expensive objects. The study in which we talk, in his house in London, is decorated like an upmarket but rather old-fashioned hotel – the carpet, bookshelves and armchairs are perfectly acceptable but entirely lack personality.
“I am not a skin-flint – well, I am a bit. I resist spending money for the sake of ostentation or showing-off. But I do own a Picasso. I don’t deprive myself.”
Twice married, he has recently been linked romantically with Jennifer Chun, a violinist several decades younger than him. He says that he met her socially, but declines to go into greater detail. Is he likely to marry again? “I would prefer not. I’m happy being unmarried at the moment.”
His sons by his first marriage, Robert and Jonathan, now jointly run his investment company. Their sister Andrea runs a trust devoted to helping resolve problems in Tibet. His youngest two, by his second marriage, are currently at university. He has set up a trust to ensure that none of them will ever need to work for a living, should they ever wish to make that choice.
His primary interest now, he says, is understanding the world. “Based on that, I try to make the world a better place.”
There’s a remarkable discrepancy, however, between his work on improving the world, and his day job plundering companies and economies. In 1997, during the Asian financial crisis, Thai nationals branded Soros “an economic war criminal”, believing that he had profited from their misfortune. Whether he did or not in that instance, his investment decisions have had consequences that often don’t benefit the poor – and they don’t appear always to follow the rules.
In France, for instance, he has a conviction for insider dealing, though he hopes that it may yet be overturned by the European Court of Human Rights. “There were thousands of people involved. Only one person got convicted. I can’t help thinking that is a miscarriage of justice. It’s a black spot, and I don’t like it. “
But what about the wider discrepancy between his philanthropy and his gambling on currencies and stocks? “There is this idea that by being a capitalist, I’m somehow squeezing blood out of peasants,” he says. “Which is absolutely not true. It’s nonsense. Maybe the companies in which I own shares are squeezing blood out of the workers, but I’m not involved in that. Being a shareholder in a company does not make you responsible for the policies of the company.”
If that’s true in the technical sense, this seems a remarkably complacent way to express it. Certainly it does little to suggest that his investment practices are intrinsically more constructive than betting on the horses.
“In an efficient market, your action as a shareholder does not influence the management’s behaviour,” he continues. “Markets are amoral, not immoral. The difference can be very difficult to explain. As a market participant, you can’t control the market. If I try to do something that goes against the market, I would have my head handed to me.
“Take the case of the breakdown of the pound” – when Soros bet against sterling in 1992 and forced Britain out of the ERM. “That would have happened whether I was part of it or not. Being part of it, of course, I made money. But I didn’t cause it. It probably would have happened without me.
“When the Bank of England raised the interest rate to stop speculation, I said that this was a counsel of despair. This means that they’re desperate.”
Taking advantage of a country’s desperation does not sound like the approach of a man who invests billions in good causes. “That is a good point. But markets are amoral,’” he repeats. “In a market, you have a lot of actors. An individual does not make a difference.”
You could say the same if you were part of a mob, setting fire to the palace.
“That is true. But then, if you have any money at all you are part of the same mob. If you put your money in the bank, the bank will storm the palace on your behalf.”blog comments powered by Disqus