Some wisdom from Soros

I got this from the New Yorker and I have also read the FT articles alluded to.

Soros logic is both simple and compelling. I agree with him.

OCTOBER 27, 2009
THE WISDOM OF SOROS

As a rule, I do not put much store by the statements of billionaires and central-bank chairmen. The former are accorded undue respect because of their wealth, the latter because of the positions they hold. In my experience, neither great riches nor high office are strongly correlated with economic wisdom and common sense. For today, however, I am making an exception: first for George Soros, the veteran speculator and philanthropist, and, in my next post, for Mervyn King, the head of the Bank of England.

Earlier this month, at a conference organized by The Economist, I heard Soros make the elementary but crucial point that rising bank profits, and thus bonuses, are no accident. The Fed, through its zero-interest rate policy and generous lending programs, has deliberately created an environment in which a chimpanzee could run a big bank and make pots of money. Banks can lend from the Fed at zero per cent, buy long-dated Treasury bonds yielding three and a half per cent, and pocket the spread. Rather than nationalizing stricken banks and recapitalizing them that way, Soros said, the U.S. government had opted to help them earn their way back to sound health.

On Friday, in an interview with the Financial Times, Soros elaborated on his theme, declaring, “These earnings are not the achievements of risk takers. They are gifts, hidden gifts, from the government, so I don’t think these monies should be used to pay bonuses. There’s a resentment which I think is justified.”

Finally, in an article in yesterday’s FT, Soros called for stricter regulation, endorsing a twenty-first-century version of Glass Steagall in which banks that benefit from the de facto government safety net, such as Goldman Sachs, JPMorgan, and Citigroup, would be banned from trading on their own accounts. “This may push proprietary traders out of banks and into hedge funds, where they belong,” Soros noted.

It would also mean that taxpayers were no longer subsidizing “heads I win, tails you lose” bets placed by banks that are too big to fail. Does that not sound like an idea worth exploring?

POSTED BY JOHN CASSIDY
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