U.S. financier Soros wants rules on global currency

By Gwynne Dyer

"Markets (have) become inherently unstable, there is nothing to hold them. They can move in unexpected ways and become chaotic. I'm afraid that the prevailing view, which is one of extending the market mechanism to all domains, has the potential of destroying society."

-- Financier George Soros, May 7, 1997

LONDON (JP): It has been a wild ride in the markets for the past week or so. It may not be over yet, but we already have moments to cherish for a lifetime.

There was the world's most notorious currency speculator, George Soros, losing US$2 billion -- 10 percent of his wealth -- in the market meltdown on Monday, Oct. 27, 1997.

There was U.S. President Bill Clinton reassuring anxious investors on Black Monday Mark II that the fundamentals of the U.S. economy were sound. (That was the signal that told the world we were really in trouble).

There was Byron Wien, investment strategist at Morgan Stanley Dean Witter, commenting on the huge market recovery of the following day: "You don't know if it's a dead-cat bounce or a resumption of the bull market." (The analysts cannot predict the future, but they do have a way with words).

And then there was U.S. Federal Reserve Chairman Alan Greenspan, telling the Joint Economic Committee of the Congress that "it is quite conceivable that a few years hence we will look back at this episode, as we now look back at the 1987 crash, as a salutary event in terms of its implications for the macro- economy."

As the panic rolled repeatedly around the globe, with each local stock market reacting to events in the ones that were already open in the time zones further east, we learned a lot about what 'globalization' really means in terms of the financial markets. But George Soros thinks we should also learn a larger lesson.

When sheep complain about high rates of predation, nobody pays much attention. When the wolves themselves start talking about the need to restore the ecological balance, however, it is time to listen hard. And though Soros is a part-time philosopher and philanthropist, in his day job he is the world's chief wolf.

Like all currency speculators, Soros's job is to hang around the flanks of the global economy and pick off the sick and the lame. It's a dirty job, but somebody has to do it -- and economists would even say that it improves the health of the flock as a whole.

Soros is a bigger, better predator than anybody else, but recently he has been having serious second thoughts about the whole system: "Unless we review our concept of markets, they will collapse, because we are creating...global financial markets without understanding their true nature. We have this false theory that markets, left to their own devices, tend towards equilibrium."

Soros has earned US$20 billion by operating on the opposite assumption: that global markets, driven by emotion and accelerated by instant global communications, can now go to ludicrous extremes in any direction. He even has a theory as to why it happens.

It's called 'reflexivity', and he discussed it at length with sociologist Anthony Giddens, director of the London School of Economics, in a conversation published in this week's edition of the New Statesman. The actual conversation was recorded last May, long before the current excitements began.

'Reflexivity', Soros observes, "is a two-way connection between what we think and what happens in the world....There isn't such a two-way connection in nature. It only happens in society, where we act on the basis of our view of the world, and our actions determine the outcome, and so shape what that world actually is."

'Infinite feedback' is another way of putting it, and it is the operating principle of post-modern societies everywhere. As we become richer and seemingly more independent of natural processes, fewer of our decisions are based on the harsh, inflexible realities of the natural world. More and more decisions are based on our estimates of what other people are thinking.

Nowhere is this truer than the markets. The successful player is not the one who predicts what will happen to a given company or country six months hence; it's the one who can predict what most other players will be thinking about that question tomorrow. It's about psychology, not economics -- and there are therefore virtually no limits on how wild the swings can get.

In a global market where the reactions can chase each other literally around the world every 24 hours, this is a preposterously dangerous situation. And so Soros, speculator supreme, wants more government regulation of the economy. Now that capitalism has no more external enemies to keep it honest, it must police itself.

"We will eventually have to have international regulation of markets," Soros believes. "...(We will have) to find...some international political co-operation to match the globalization of markets. Because what is lacking is the ability of society to impose constraints on the market."

The global market has positive aspects -- for example, it has allowed many Third World economies to break out of the poverty trap by exporting their goods and services to the First World -- but Soros scarcely mentions them because he isn't selling anything. There's no need to sell globalization because modern means of communication make it inevitable anyway.

The task is to cope with the huge negative effects of globalization, and Soros is very blunt. "What global competition has done has been to benefit capital at the expense of labor, and to benefit financial capital to the detriment of fixed investment....This destroyed the basis of the welfare state, because you can't tax capital easily...and so high-tax countries suffer because capital flees."

This is an accurate description of the new economic reality, but it doesn't make sense in human terms -- or even in financial terms, because the new markets are highly unstable and unpredictable. So Soros is talking about the need for global political authorities that can regulate the capital flows -- and thereby create an environment in which the politics of equality can re-emerge from its post-Cold War slumber.

We are getting perilously close here to the "love that dares not speak its name". Socialism is dead, and even old lefties have been reluctant to mention it in polite company in recent years. But here is the chief wolf himself invoking its basic principles.

We should not be surprised. The collapse of Soviet Communism six years ago was a kind of political neutron bomb, leaving only right-wingers standing, even though most left-wingers elsewhere despised the Soviet system. But the left-right argument in its present form is over 150 years old, and those societies that have done best historically are those that listened to both sides.

When the world's chief currency speculator says that it is time to revive that argument and end the destructive ideological monopoly of the right, it is probably wise for the sheep to take notice. But Soros doesn't pretend that regulating the markets will be easy, let alone re-creating some kind of social safety- net: "Somehow the accumulation of capital has to be tapped, to provide the basis for social insurance. And that's a tough sell."

We will probably go through a lot more pain and woe before equilibrium is re-established, either in the markets or in politics more generally. But somewhere in the distance, I think I heard a dead cat bounce.