George Soros' World-Class Ego

This past weekend's Wall Street Journal edition carried a piece on George Soros' latest warning- an asset 'superbubble.'

Like Julian Robertson and Michael Steinhardt, George Soros seems to get lavish attention long after his period of successful trading, or investing, if you prefer, has ended.

The Journal article notes that Soros made large fortunes in 1992 and 1997 by betting, respectively, against the pound and the bhat. While never proven, rumors have always swirled around Soros concerning whether or not he was the recipient of insider leaks about the British financial authority's intentions regarding the pound.

Now, writes Greg Ip, Soros,

"wants to be remembered most as a philosopher. Since he was a student in 1952, he has been promoting his economic theory, which he calls 'reflexivity.'

In essence, he argues that markets don't simply reflect fundamental determinants but can change those determinants in a way that causes asset prices to go to extremes. In his latest book, "The New Paradigm for Financial Markets," he argues a "superbubble" has developed in the past 25 years and it is now collapsing."

Ip notes that Soros' predictions have routinely falled wide of the mark. He prematurely sounded the death of the US dollar in 1987, yet neither the world-wide depression, nor global conflict of which he warned have arrived. In 1998, he claimed that

"The global capitalist system....is coming apart at the seams."

Actually, it would seem that in the decade since Soros wrote that somber prediction, global capitalism has contributed to more trade, wealth creation and freedom than ever before in man's history.

Believe it or not, Soros actually alleges that, because in the story about 'the boy who cried wolf,' the wolf really arrived after three warnings, his three most recent books warning of global economic catastrophe mean he is now probably correct.

I'm serious. Greg Ip's piece quotes that comparison by Soros. You cannot make up stories this silly.

To prove how important his ideas are, Soros notes,

"The most popular reaction to my philosophy is....success has gone to his head and he wants to be more than what he is....But I would like my ideas to be judged on their own merit. I think I'm on the verge. For the first time, this book is a best seller. I was asked to testify (before the Senate Commerce Committee) because a staff member read the book."

Well, if I told George Soros that I happened to see a copy of his book in the garbage, would he promptly declare it to be garbage, too?

If he seriously believes that because some no-name staffer to some Senatorial windbag read his book, it now is important, his long-ago success has gone to his head.

I laughed when I read the next passage, where Soros answers Ip's question about whether policy or academic heavyweights are noticing his ideas,

"It has certainly not penetrated academia, and not policy makers, either. I wish I could engage in a discussion with (the Federal Reserve). I'm waiting for a phone call. I'm (meeting with) Alan Greenspan."

These days, I don't think Greenspan's such a hot economic ticket, George.

At the end of Ip's piece, he quotes Soros actually saying something interesting,

"This is, of course, [Joseph] Schumpeter's creative destruction idea. However ... going overboard in generating change is not necessarily a good thing. Financial innovation may not be an unmixed blessing because it really prevents proper regulation.

If you look at the 19th century, you had creative destruction going on, one financial crisis after another. But each time you had a crisis, you had an examination of what went wrong, and you put in some instrument or some institution to prevent it from happening.

I'm not advocating ... central planning because that's worse than markets. But the regulators need to learn from the mistakes that they have made. I think it's pretty clear that you've got to accept responsibility for moderating asset bubbles. ... That involves regulating credit as well as [interest rates]."

It's not clear what Soros is actually saying here beyond the existing awareness that some regulation of financial services is a beneficial activity. He does not speak to the perennial difficulty of staffing such governmental entities with employees who are as motivated and intelligent as those whom they would regulate.

Perhaps what would satisfy Soros, and it would satisfy me, is to regulate certain classes of financial services activities, such as insured deposit-taking, residential mortgage, consumer and conventional business lending, and transactions processing, very strictly and heavily, so as to safeguard these core economic activities.

Non-commercial banking practices involving riskier investments will always be subject to loss of capital and liquidity risks, to name just two. It's unclear how much regulation can function effectively, other than to try to herd over the counter markets, such as swaps, into exchanges. The Treasury, under Paulson, is already headed that way.

As I wrote here a while ago, in response to Henry Kaufman's tirade against financial innovation, I think, over time, we've been far better served by the phenomenon than we've been hurt by it.

I think Soros' thinking here is muddled, if it's anything relevant at all.

Why does anyone pay attention to him? Because, I guess, like Robertson and Steinhardt, once, years ago, in different market conditions, George Soros made a lot of money. And even he confirms it was due in no small measure to luck.

So on this basis, we should all listen to his personal crackpot theory of 'reflexivity?'

God help us if that's what we've sunk to in the US.