First, Soros defines the problem of the ideology of market fundamentalism:
GEORGE SOROS: .... There has been some kind of an ideological excess; namely, market fundamentalism for the last 25 or so years. And now that world is collapsing...
BILL MOYERS: What do you mean "market fundamentalism"?
GEORGE SOROS: It's that markets will correct themselves, that you should leave it to the markets, and there is no need for government intervention in financial affairs. Letting markets run rampant. And that doesn't work.
Markets have the ability to adjust and they're very flexible. There is this invisible hand. But it is also prone to be mistaken. In other words, markets instead are reflecting reality. They always look at reality with a bias. There is always a prevailing bias. I'll call it, you know, optimism/pessimism.
And sometimes those moods actually can reinforce themselves so that there are these initially self-reinforcing but eventually unsustainable and self-defeating boom/bust sequences or bubbles. And this is what has happened now.
This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive.
Of course, one can argue that boom-bust cycles are themselves the market working as advertised, the invisible hand correcting itself. But that's really not what Smith was arguing in the original. Smith was arguing about small-scale capitalism, and interactions with large numbers of firms, not quasi-cartels. Nor is that the only thing going on here. Soros is saying that there are other feedback loops in the equation besides the one that lowers prices when they get too high, and raises them when they get too low. Thus, there are at least two different ways in which we can understand the simple model that Smith started out with breaking down as things get more complex. And market fundamentalism denies the very possibility that such breakdowns can occur. It is, indded, a form of religious faith.
Next, Soros goes on to talk about the current threat of disaster, and how it's rooted in market fundamentalism, because those who should be containing the problem are making things worse, due to their market fundamentalist beliefs:
BILL MOYERS: You used the word "disaster."
GEORGE SOROS: The financial system is teetering on the edge of disaster. Hopefully, it will not go over the brink because it very rarely does. It only did in the 1930s. Since then, whenever you had a financial crisis, you were able to resolve it. This is the most serious one since the 1930s, there hasn't been one as serious as this.
Unfortunately, the authorities are behind the curve. They are reacting to these crises as they emerge. One thing leads to another, one market after another gets into difficulty. And they react to it. And they don't quite understand what's hitting them. So they are not anticipating and not gaining control of the situation.
BILL MOYERS: This is what's interesting, why wouldn't the government be able to look at what you looked at and see what's coming?
GEORGE SOROS: Because actually they have been working on false premises. This sounds very strange, but there's been this development of, this belief of market fundamentalism. And particularly the idea that markets always revert to the mean and deviations from the mean occur in a random fashion. And you can calculate it.
And you will get a nice distribution and you can anticipate it. And based on that, you can manage your risk. And that actually was based on a false idea. This namely, the markets self-correcting because the market moods have a way of affecting the fundamentals the markets are supposed to reflect.
That's a very key point there. In Smiths more primative world, the fundamentals could not be effected like this, at least in any noticable way. His world was sort of like Newton's where the extreme conditions producing relativistic effects never entered into the picture. They were there all along, but were simply too small to ever notice. And so a much simpler model than reality demanded was quite adequate for all pracrical purposes.
The analogy breaks down in that what Soros is pointing to is actually more Smithian than Smith himself: the circular causation Smith limits to his invisible hand regulating prices is not just limited to that sphere, but rather pervades everything, and thus, as Soros puts it, it affects the fundamentals it is supposed to merely reflect.
And there's always a divergence between our perception and what actually exists. For instance, take the simplest situation, namely housing.
Banks give you credit based on the value of the houses. But they don't seem to somehow understand that the value of the houses can be affected by the amount of credit they are willing to give. Now, we've developed these fabulous new ways of securitizing mortgages, which has made credit much more amply available.
And we've been able to calculate risk. And, therefore, we were willing to give more and more credit. And that has pushed up the value of the houses. Also, of course Greenspan kept interest rates too low, too long. And so you had very low interest rates, easy credit, and house prices have been appreciating at more than ten percent a year for a number of years. And the willingness to lend actually increased. There was an insatiable appetite for these new fangled securities.
In short, the very belief in the purity and simplicity of Adam Smith's model blinded the market fundamentalists from seeing how they were introducing contradictory forces that were disturbing the very simplicity they believed in.
Of course, left to their own devices, markets will always do this. Commercial markets develop financial markets to facilitate their functioning, and then financial markets take on a life of their own, altering the conditions under which commercial markets operate, and gradually undermining them. As Kevin Philips has repeatedly argued, great powers experience decline and fall in part because financial markets grow divorced from commercial markets, they grow far more lucrative, and thus end up eroding the real ecomony, the material foundation for world power in the first place.
There's an interesting discussion of credit expansion in the interview, worth looking at, but I'm not going to quote the entire interview. You'll have to click the link for that. After that dicussion, talk turns to what ought to be done-bank nationalization or the encouragment of similar private investment-and why even this might not work, because it may be coming too late:
BILL MOYERS: So as we talk, Secretary Paulson and the government seem to be coming around to what you've been advocating and that is taking taxpayer money, public capital, and injecting it directly into the banks - in effect, nationalizing some of these banks. Why do you think that will work when everything else has failed?
GEORGE SOROS: Well unfortunately because they are delaying it, it may not work so well because there's a certain dynamism. And they're always behind the curve. So there are many things that they're doing now if they had done several months ago, it would have turned things around.
Eventually, he thinks, we will get things stabilized, but it will be much more painful than it should have been. Then there's the question of "what next?"
GEORGE SOROS: But we are heading for undoubtedly very difficult times. This is the end of an era. And this is a fact.
BILL MOYERS: End of an era?
GEORGE SOROS: At the end of an era.
BILL MOYERS: Capitalism as we have known it?
GEORGE SOROS: No. No, no, no. Hopefully, capitalism will survive. But the sort of period where America could actually, for instance, run ever increasing current account deficits. We could consume, at the end, six and a half percent more than we are producing. That has come to an end....
BILL MOYERS: Well, don't be shy. What do you think the new government should do?
GEORGE SOROS: Well, first of all you have to prevent housing crisis from overshooting on the downside the way they overshot on the upside. You can't arrest the decline, but you can definitely slow it down by minimizing the number of foreclosures and readjusting the mortgages to reflect the ability of people to pay. So you have to renegotiate mortgages rather than foreclose.
And you provide the government guarantee. But the loss has to be taken by those who hold the mortgages, not by the taxpayer.
BILL MOYERS: You mean the homeowner doesn't take the loss. The lender.
GEORGE SOROS: The homeowner needs to get relief so that he pays less because he can't afford to pay. And the value of the mortgage should not exceed the value of the house. Right now you already have 10 million homes where you have negative equity. And before you are over, it will be more than 20 million.
BILL MOYERS: But, you're talking about taking action three months from now, whether it's a McCain administration or an Obama administration. What happens in these next three months? And I'm serious about that.
GEORGE SOROS: I am very worried about it. And I hope that they will have a new secretary of treasury, somebody else.
Skipping down a bit, the question broadens:
BILL MOYERS: Has the whole global system become so complex with such gargantuan forces interlocked with each other, driving it forward, that it doesn't know how to obey Adam Smith's natural laws?
GEORGE SOROS: No, I think our ability to govern ourselves doesn't keep pace with our ability to exercise power over nature, control over nature. So we are very complicated civilization. And we could actually destroy our civilization because of our inability to govern ourselves.
BILL MOYERS: Would this all be happening if we still had a strong sense of the social compact? I mean, our social safety net has been greatly reduced. The people have a real sense that the gods of capital have left little space for anyone else. People at the top don't have much empathy for people at the bottom.
GEORGE SOROS: There is a common interest. And this belief that everybody pursuing his self-interests will maximize the common interests or will take care of the common interests is a false idea. It's a suitable idea for those who are rich, who are successful, who are powerful. It suits them to justify you know, enjoying the fruits without paying taxes. The idea of paying taxes is an absolute no-no, right?
BILL MOYERS: Unpatriotic.
GEORGE SOROS: Unpatriotic. So, yes, you must have, in my opinion, you need, for instance, a tax on carbon emissions. But that is unacceptable politically. So we are going to have cap and trade. And the trading will have all kinds of loopholes and misuse of the regulations and all kinds of ways of making money without actually dealing with the problem that it's designed to cure. So that's how the political process distorts things.
Precisely! The whole neoliberal, market-fundamentalist paradigm has to be scrapped. Tinkering around inside that paradigm will only make matters worse, curing one disease with another that's even worse.
Getting toward the end, Moyers asks for a short list of three things we can do. And here is where Soros points us toward a really big picture reorientation, not just of our economy, but of our society and cultural as well:
GEORGE SOROS: Well, deal with the mortgage problem. Reduce foreclosures. Recapitalize the banks. And then work on a better world order where we work together to resolve problems that confront humanity like global warming. And I think that dealing with global warming will require a lot of investment.
You see, for the last 25 years the world economy, the motor of the world economy that has been driving it was consumption by the American consumer who has been spending more than he has been saving, all right? Than he's been producing. So that motor is now switched off. It's finished. It's run out of - can't continue. You need a new motor. And we have a big problem. Global warming. It requires big investment. And that could be the motor of the world economy in the years to come.
BILL MOYERS: Putting more money in, building infrastructure, converting to green technology.
GEORGE SOROS: Instead of consuming, building an electricity grid, saving on energy, rewiring the houses, adjusting your lifestyle where energy has got to cost more until it you introduce those new things. So it will be painful. But at least we will survive and not cook.
BILL MOYERS: You're talking about this being the end of an era and needing to create a whole new paradigm for the economic model of the country, of the world, right?
GEORGE SOROS: Yes.
Here's the irony, of course: What Soros is talking about is, on the one hand, something that DFHs have been yammering on about since the heyday of the Whole Earth Catalogue. And, on the other hand, it's also something that encompasses all the old shibboleths of conservatism-preserving social stability, and order, living within our means and promoting productive, responsible individual behavior.
Where it differs radically from conservatism, of course, is that it's not just a vision for the elite few, or one that preserves their power under the guise of being best for everyone. No, it's a vision of a world that really does work for everyone. Which is why it's time for the authoritarian conservatives to exit from the stage of history, like the monarchs and dictators before them.
The way forward is not the way back. Time for Another Green World.
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