China will be the biggest winner of the current financial crisis, US billionaire and philanthropist George Soros said. The financier gave an interview to Germany’s Die Welt, in which he told of the roots of the crisis and said that the mortgage bubble only triggered the process, which entailed the economic collapse. The businessman also explained the reason why the Bush’s administration proved to be unable to cope with the crisis.
The crisis, which is obviously the most serious crisis since the 1930s, was formed inside the financial system, George Soros believes. The current events are not the consequences of the external shock, which broke the balance. “As experience shows, financial markets destabilize themselves,” Soros explained.
He believes that markets tend to go out of balance from time to time. Soros’ theory differs from the general opinion with two issues. First of all, financial markets do not reflect basic economic indexes; market members constantly distort them. Secondly, the distortion on the financial markets may affect the basic indexes, as it happens in case with the bubble or a collapse, the billionaire believes.
Soros explained how it all happened. The prices on real estate and dot.com markets skyrocketed as a result of euphoria. The panic may shatter banks. “This dual connection, when you affect something that you expect, I call reflexivity,” Soros said.
Soros’ market management reflexivity theory says that the market depends on investors’ expectations and their confidence in the banking system. These are purely psychological aspects. Consequently, they can be affected from the outside – with the help of informational provocations and wars.
“Financial markets function so indeed. Their instability affects the real economy, not vice versa. It does not go about the mortgage bubble alone. It only triggered the collapse of another system. It is a super bubble filled with growing credits and debts, as well as with the assurance of the fact that the markets will correct themselves. The bubble was growing for 25 years and now it burst,” the investor said.
Soros believes that governments should realize that markets do not correct themselves. The Bush’s administration has not been able to cope with the crisis because the authorities relied on the market fundamentalism ideology, the economist thinks. “They thought that the markets will improve the situation themselves. Treasury Secretary Henry Paulson thought that the market recovered six months after the bankruptcy of Bear-Stearns. They did not realize the nature of the problem, they did not see a need for the state to interfere,” he said.
“No one was working on a plan. When the consequences of Lehman’s bankruptcy became obvious, Paulson had to do something urgently to save AIG. The turmoil occurred on the securities market the next day, and Paulson had to think of something new again. He announced the 700-billion-dollar bailout plan. However, he wanted to purchase long-term assets from the shattered banks,” Soros said.
US consumers will not be able to play the role of the engine of the world economy if world recession occurs. The US administration must stimulate the demand.
“Since there is global warming and energy dependence threatening the USA, the next administration will need to direct all development programs on the energy saving, the development of alternative energy and the construction of green infrastructure,” Soros said.
The United States and a part of Europe will have nationalized banks and huge debts. China will become the new global financial empire.
“The USA’s influence has already begun to decline. For the past 25 years, we have been running a constant current account deficit. The Chinese and the oil-producing countries have been running a surplus. We have consumed more than we produced. While we have run up debt, they have acquired wealth with their savings. Increasingly, the Chinese will own a lot more of the world because they will be converting their dollar reserves and US government bonds into real assets. The power shift towards Asia will occur as a result of the sins which America committed during the recent 25 years," Soros said.