The famous financier George Soros has made billions betting where the economy — and the markets — are heading. He's been less prescient in his books, where twice before he predicted financial disasters that didn't fully materialize.
But in his latest book, The New Paradigm for Financial Markets, Soros writes that we are now in a financial crisis that's unparalleled.
"It's the worst, most serious crisis of our lifetime," Soros tells Steve Inskeep.
Soros blames what he calls a "super-bubble" that started about 25 years ago. That's when a less-is-more philosophy became popular with economic regulators. That allowed Wall Street to invest increasing amounts of money in credit.
"The idea was that regulators always make mistakes, state interference in the markets just messes things up," Soros says. "And that was a false idea .... Regulators are human and bound to make mistakes, but markets are also human and they are also bound to make mistakes. Instead of markets always being right, they're actually always groping at trying to find out what the facts are. But they never get it right."
'Strange' Financial Instruments
Soros says there's a "super-bubble" in the economy that's bigger than just the recent housing crises, and he blames exotic financial instruments for helping cause it.
"The markets have introduced financial instruments with fancy names — CDOs and CLOs and all these strange instruments that are traded in very large volumes. And they were all constructed on the belief deviations are random. That's how some of those instruments were rated AAA and institutions bought them, and a few months later they turned out to be valueless and they were selling at 10 cents on the dollar."
Soros disagrees that much like the housing market, America, as an investment, is overpriced.
"I am saying that America has in the last 25 years sucked up the savings of the rest of the world and consumed it and issued a large number of IOUs," he says, referring to U.S. debt. "These IOUs are now held in the central banks of China and other Asian exporting countries [including Japan] and oil producers."
Those countries are worried that there's too much U.S. debt and "they don't want to hold" those IOUs, Soros says.
A Serious Combination: Inflation and Recession
Without a "good alternative to holding dollars," he says, these countries set up government-controlled sovereign wealth funds, which are investing billions of dollars in the United States and other nations.
"This is one of the factors that has fueled energy prices, commodity prices and more recently food prices," Soros says. That is "setting up inflationary pressures at the same time as the [U.S.] is on the verge of a recession.
"So you have a recession and inflation at the same time," he adds. "That's why this crisis is different from the previous ones."
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