Monday, May 19, 2008

Soros warns global boom is over


Billionaire investor George Soros has given his gloomiest assessment of the state of the US and world economies.

He told BBC business editor Robert Peston that the "acute phase" of the credit crunch may be over but effects on the real economy are yet to be felt.

He warned the "financial bubble" of the last 25 years could be drawing to an end and the post World War II "super-boom" era could also be over.

He predicted a "more severe and longer" US slowdown than most people expect.

And he said that the UK was worse-placed than America to weather to coming economic storm, because it had such a large financial sector and has had the biggest increase in house prices.

Gloomy bankers

Mr Soros said that the current mandate of most of the world's leading central banks - where their main focus was fighting inflation - meant there was limited scope for cutting interest rates to help economies recover.

As for the Bank of the England, he said, "it was like a Greek tragedy", because they "couldn't do a U-turn" until there was a full-blown recession, which would finally take away the price pressures.

It was "inevitable" that they would keep rates too high for the good of the economy, he added.

In part, Mr Soros is echoing the gloomy forecast of the world's central bankers in recent weeks.

The head of the European Central Bank, Jean-Claude Trichet, recently told the BBC that the "market correction was still on-going".

Mervyn King, the governor of the Bank of England, warned in the Bank's inflation report that UK inflation would rise above its target while the economy would slow sharply.

Moral hazard

Mr Soros believes that central bankers are partly to blame for the credit crunch because of their past behaviour in bailing out the financial sector whenever it got into trouble for over-lending, the so-called moral hazard problem.

He said that the central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far.

And he said that tougher but smarter regulation would be needed in the future in order to reduce the excess supply of credit in the economy.

These could include measures to force banks to put aside more reserves in good times to help cushion them in bad times.

Misguided markets

Mr Soros believes that oil and other commodities are over-priced, but he sees little chance of the price of oil coming down until there is a big slowdown in the richer economies.

He sees the price of oil as being driven by higher demand in developing countries such as China, where subsidised energy costs mean there is less price-sensitivity.

He also said that stock markets are still underestimating the severity and length of the economic downturn, especially in the US, and are now having a "bear market rally".

Profiting from the crisis

Mr Soros has credibility partly because he is prepared to invest his own money to back up his convictions.

The private investment fund he has resumed managing made a return of 34% last year betting that the credit crunch was more severe than many people expected.

Mr Soros was the man reported to have made $1bn in September 1992, betting correctly that the British currency would have to be devalued and leave the European Exchange Rate Mechanism.

Mr Soros has devoted much of time since then to philanthropy, especially in Eastern Europe.

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