FCIC Staff Interview — Financial Crisis Inquiry Commission

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slug: fcic-2010-interview year: 2010 title: "FCIC Staff Interview — Financial Crisis Inquiry Commission" source: https://fcic.law.stanford.edu/interviews/view/188 type: interview

FCIC staff interview with George Soros, October 4, 2010, New York — Soros's crisis autopsy in his own framework: the super-bubble's origins in 1980s market fundamentalism, moral hazard, the Lehman mistake, and the two-phase maneuver of quantitative easing. No official transcript was published online; this is a machine transcript (faster-whisper, 2026-07-29) from the commission audio, with heuristic speaker labels. The transcript may contain recognition errors — verify against the audio before external use.

Soros: We're here from the Financial Crisis Inquiry Commission. I'm Gary Cohen. I'm the general counsel, my colleague Kim Schaefer and Donna Norman. We are charged with investigating the causes of the financial crisis in 2008 and 2007 and perhaps in 2009 and 10. And this is a on the record recording that we're doing with George Soros. We're in New York and it is five minutes to five. We're a little bit early and Mr. Soros, you are OK with us taping you on this episode.

FCIC: Very good. And would you like to introduce yourself to us?

Soros: It's my name is Michael Vashon. I am an employee of Soros Fund Management and I advise Mr. Soros on a number of topics. I'm Rob Johnson. I'm the executive director of the Institute for New Economic Thinking. Formerly a partner at Soros Fund Management many years ago and work frequently with Mr. Soros on questions of financial regulation.

FCIC: Pardon me. Well, we're going to ask you questions about why was there a financial crisis?

Soros: What what what it was actually what part of the crisis we're going to ask you questions about regulation system issues and things of that nature. And at any time there's things that you want to add. I mean, you can be as candid as you wish. We've had some remarkably candid conversations today with a couple of other people we've spoken to.

FCIC: What do you think was the financial crisis itself? Where do you think it stopped being the beginning of a recession, say, and became what it turned out to be the great recession or the great almost depression?

Soros: Sometime, I would say early in 2007, maybe on March or so when when the first bankruptcies occurred. But it was something that could be anticipated much earlier than that. And those of us who did actually did not expect that you would take that long for it to develop.

FCIC: What what do you think caused when you when you say it started in 2007 and you anticipated it? What did you what did you see that made you think it was happening and then delayed it from actually popping?

Soros: I guess if you could call it happening away. Well, I have a conceptual framework in terms of which I interpret financial markets and that conceptual framework. Actually, let me to anticipate anticipated and I really think that the process started in the goes back as far as the early 1980s. There have been a number of cases and each time the authorities prevented a financial crisis from affecting the economy and the measures they took then reinforced the process. Making the bubble bigger until it became so big that in fact the authorities were unable to contain it. And that's how we had the financial crash following the bankruptcy of Lehman Brothers in 2008.

FCIC: What do you think started in 1980s? What what was going on?

Soros: The interpretation of the financial markets and an ideology connected with it came to dominate public policy. I call it market fundamentalism for short.

FCIC: You mean at the regulation philosophy?

Soros: That had basically globalization of financial markets and deregulation of financial markets. And as a state of financial innovations which were based on this false ideology.

FCIC: Do you think the innovations were had value or were they valueless or were they?

Soros: They had some value but they also had some negative effects. You have to look at them case by case.

FCIC: How did the financial system change over that 30 year period or so?

Soros: That you thought accelerated it indeed. One of the remarkable features is the growth of credit and leverage. Generally speaking credit has been growing significantly faster than GDP ever since the end of the Second World War. But it's really only around 1980 that the situation got out of hand. But the growth in credit and leverage could be observed even before that. I looked at that chart in your book comparing the two and when you say in the 80s it started getting out of hand.

FCIC: Just that the percent of debt to GDP started on a much steeper incline or is there something else going on?

Soros: Globalization and deregulation became dominant. You mentioned that there were actions taken in response during the 80s and I guess in the 90s.

FCIC: Are you talking about the famous, the Greenspan put? You mean the keeping interest rates?

Soros: That is part of it but I think it was much more pervasive. It was a belief that financial markets basically correct their own excesses and tend towards equilibrium. Therefore they don't need to be regulated. Well, Greenspan has gone on records saying he was mistaken in that. Chairman Angelita is the chairman of the Commission. I think one of the hearings where he said was that an oops moment where there was a mistake made.

FCIC: Do you think that this crisis was avoidable at any point in that period of time? Or do you think it really was inevitable starting in the turn of the century perhaps?

Soros: I think that it was certainly avoidable. Generally speaking the course of events is indeterminate and is determined by the actions and decisions that people take as they go along. Different decisions would have brought very different results. So let's go back to 2007 and I believe that was when you started writing your book that you ultimately called The Crash of 2008.

FCIC: So what did you see then that troubled you in the markets that made you concerned that we were heading into a difficult time?

Soros: Well, the main focus of trouble was clearly the housing industry. And within the housing industry the securitization of mortgages. And the introduction of unsound instruments like those subprime loans and teaser rates which the name implies deception. So I just want to build from there if I might. So you saw the signs in housing and you've written about the Superbubble and the expansion of credit.

FCIC: But back in 2007 were you aware of concerned about fragility of large financial institutions?

Soros: Yes, I would have to actually have to probably refresh my memory. But I wrote an article in January 2007 where I warned of the impending troubles that was in financial times. I can send you all of George's articles. If you look on his website, actually, I'm George Soros. You'll see all the FT articles there. I can look at that. Okay, fine. We did try to prep but not as completely. So I can't at this point recall exactly how I put my concerns. But the focal point was, of course, the trouble in the housing market. But there was also deregulation which has broken down the various firewalls that separated different markets. And so the, I mean, if I recall, in the subprime market and but he considered it to be an isolated problem of maybe which could cause the damages of a hundred billion dollars or so. And the system could easily absorb it. What he left out of account was the contagion, how the collapse of one market and then led to dislocation in other markets with remarkable speed. And that was because the networking connections between the various markets and the spread of the effect from one market to the other. You wrote in the second version of your book that you while you had anticipated a lot and sounded warning bells that you didn't foresee. The actual bankruptcy of Lehman Brothers. And I consider that to have been a mistake on the part of the regulators, the authorities to allow it to happen. Now, of course, they have their excuses, but I think that they are feeble excuses because while the legal powers for intervening may not have been clearly defined, I believe that they could have done whatever was necessary if they had considered it necessary. And it could have been later accepted and regularized. In other words, the Fed, in my opinion, has very wide discretionary powers which were not used. This is something that confuses me about reading your book, that on the one hand you say one of the causes of the super bubble is that whenever there were problems in the system, regulators fixed it up, patched it up, and that there were negative consequences of the continuation of the bubble as a result. Yet here we get to Lehman, and forgive me what I'm misunderstanding, you're saying it's a mistake that they did not patch that one up. That's right, that's right. Basically, the authorities impose market discipline, except when the system itself is in danger. And at that time they intervene and suspend the discipline that is supposed to guide them and do whatever is necessary to keep the system together. This is generally described as moral hazard, and that is at the core of what happened, because it is in fact the moral hazard that allowed the bubble to get so large because the measures that the authorities took had the effect of reinforcing the imbalances that caused the crisis. In whichever crisis we are talking about, generally crisis is brought about by excessive use of credit and leverage. And the way you deal with it is to increase the credit and leverage that is available and in fact substitute the credit of the state for the credit that is failing. And that is in fact what happened after the mistake was made and Lehman was allowed to go bust because effectively the financial authorities internationally gave an undertaking not to allow it to recur again. And no system established an important institution would be allowed to fail. So after the mistake of Lehman Brothers, which caused the crash, again the same method was used to save money. To restart the economy and to make the crash, which temporarily threatened to total collapse within bounds and the system has actually recovered. But the amount of leverage in the economy has actually been increased. The balance sheet of the Federal Reserve jumped from 600 billion to 2 trillion in a very short order.

FCIC: So are we still in the Superbubble?

Soros: This remains to be seen actually because to control the situation the authorities had to engage in a very delicate two phase maneuver. First they had to replace the credit that failed and only in the second phase can they withdraw it. But we haven't apparently reached the second phase because we are now about to engage in yet another injection of quantitative easing. So the stimuli I use is when a car is skidding then you first have to turn the wheel in the same direction as the skid. And only when you regain control can you hope to correct the direction of the car. And that is in fact what the authorities undertook after Lehman Brothers.

FCIC: Do you think the authorities should have allowed Bear to fail? Should have allowed Bear Stearns to fail?

Soros: No, I don't think they should have allowed Lehman to fail. No, I'm just asking if there are those who feel that if the smaller investment bank Bear Stearns has been allowed to fail, then the market may have prepared for the possibility of failure and pulled back and the Lehman crisis might have been different. I don't agree. And I think history shows that the authorities have effectively always erred on the side of caution. And extended and came to the rescue when there was any danger of systemic collapse. The first major instance of which I am aware of was by the Bank of England in 1974 when they intervened to protect the quasi banks. Slater Walker was one of these institutions that I knew particularly well, but there were a number of them. They were outside the supervision of the Bank of England, but nevertheless they intervened because they were afraid that if they failed they would endanger the clearing banks which were under their supervision. So they extended the credit further than their actual mandate called for. And that was the first time that it happened and it happened repeatedly both here and abroad. So the argument that by allowing some institutions to fail, the moral hazard can be cured, it has no credibility because when the event actually occurs, then the authorities will always first save the system rather than to test that theory. They can't afford to take that. They feel that they can't take the chance of testing that theory, whether in fact that the institution was systematically would bring down the system or not. So it is an excuse for refusing to accept the implication of the fact that there is this implicit guarantee by the authorities, which means that they have an obligation to prevent that guarantee from being used.

FCIC: As a hedge fund manager, do you rely on that implicit guarantee in making your decisions?

Soros: No, I don't. Although I can recall an instance going way back when I had a very large position in British government bonds and I was very close to blowing up and I thought actually if it really came to that that I would go to the Bank of England and ask them to protect them, the government bond market. So even I, and even before these whole things developed, and this goes back to actually to early, early 80s, early 70s, 90s, early 80s. So even I have this implicit guarantee in my mind.

FCIC: So is there a solution then to the two-base appeal problem?

Soros: Yes, there is. I think that the authorities have an obligation, it's their duty to prevent the guarantee from being called upon. And therefore they have to impose regulations that make it unlikely that, so then we have to have prudential behavior. And deposit taking institutions are subject to the authority of the central bank. And the central bank then has the ability and the duty to regulate. And as I just mentioned that they extended the guarantee even beyond the institutions which they regulated in order to protect those institutions. So that guarantees a very strong one. And it's actually I think quite reasonable that you don't want the system to collapse. You don't want to take chances with that because you've seen what happened when women was allowed to go bust. And within two days Hank Paulson had to reverse himself. And within a week he had to ask for a large blank check from Congress. Well the system had gotten very fragile. Some, one of our other interviews, the person who was talking to said that he thought that had there not even been a sub-prime crisis, he thought it would have been something else because of the nature of the system.

FCIC: I mean, is that something that you share?

Soros: Yes, until you learn the lesson that correct the false doctrine that was guiding both market participants and regulators, it was liable to go there although one could never tell what it would be that would cause it. Then eventually, for instance, in case of housing it became clear that that was going to be the focal point. But before that, you could foresee that it would happen, but you couldn't foresee where it would happen.

FCIC: Because of what? Because of connectedness?

Soros: Basically bubbles have two components. There is usually a misconception involved. In other words, there is a trend that actually occurs in reality. And then there is a misconception relating to that trend. And let's say the most common kind of bubble which occurs most frequently, which is in real estate, either housing or commercial real estate or it might be agricultural. The trend is the easy availability of credit. And the misconception is that the easy availability of credit doesn't influence the value of the collateral. And therefore you can lend under collateral because it's safe. And that misconception recurs in very different ways and it was very much present in the housing bubble. Because of the synthetic instruments that were based on that misconception that by diversifying the risk you actually reduce the risk. And it did not take into account that by introducing those instruments the whole market gets inflated. That was left out of account. So in the case of the prevailing trend was the continued extension of credit due to the intervention of the authorities. And the misconception is that markets correct their own excesses. The fact was, of course, that it was the authorities that prevented markets from collapsing. It wasn't the markets that collected their excesses. It's the intervention of the authorities that kept it together. And that intervention reinforced the excess, namely the availability of credit. And that's how you had one crisis after another. Each time the authorities intervened to carry out the failing institution, lower the interest rates were appropriate or made some other arrangements to make credit available. Which then kept the process going.

FCIC: So how would the system have corrected itself?

Soros: Obviously it didn't.

FCIC: But you think there should have been more regulation?

Soros: And you think that the Greenspan theory of self-correcting markets or self-policing markets, because of market correction, could be, don't say, bear, don't say, leave them and let everything fall apart. And then the market corrects itself meanwhile there are people out of work. So I don't know that Greenspan was actually in favor of that. And Greenspan argued that the advantages of innovation, financial innovation, are so great that the price you pay when occasionally things get out of hand and you have to pick up the pieces. That price is a small price to pay for the benefits of that increased efficiency and so on that come from financial innovation. I disagree with that. Mainly because the people who pay the price are not the same who get the benefit from the innovation. It's a distributional problem and there is no mechanism for compensating one to the other. After the crash of Lehman, the class of Lehman, Greenspan said that he could no longer make that claim because he saw the damages being too big. Since then I think he's probably reverses you and still has gone back to arguing that the prices was paying. So that was a moment of concern. But then you see, Larry Summers has held the same view saying that the system works very well except once in a hundred years. And I guess now that the event has occurred, the hundred-year storm as fast as it can go back to business as usual. Some people did see it. Paul Volcker saw it. Paul Volcker and if you believe Paul Krugman he was writing about it. But nobody or at least not too many people, other than the people in the big short who made a lot of money out of it. Not too many people acted on it.

FCIC: Is there just a group think in the economic system that doesn't allow itself to look outside of whatever the conventional wisdom is?

Soros: Well, there certainly is group think. But you have more than one groups in any market I would say and there was a group that saw it coming. But unless you get the timing right you can easily be forced out of that view. And as I say, it's really only by accident that you get it completely right. In fact, I would say it does happen, I suppose. But with a tiny minority of cases basically market participants are almost always wrong. But it's characteristic of a bubble that the naysayers are swept aside. So let's say a banker that refuses to play the game is liable to be removed from his position. Or the bank is liable to be acquired by another bank that is much more daring and therefore has much better results. Because it's the characteristic of a bubble that it reinforces the misconception. So those who adopt the misconception are actually right in that misconception until they are not. And they gain credibility and weight until the group is, let's say, until there's nobody else to be won over. That's when the catastrophe actually takes place. I expect you to disagree with this point of view. But some have argued that derivatives are beneficial because they allow the negative sentiment to be articulated in some way. And so, for example, from that point of view, the ABX index, which went down considerably, was a useful instrument to have. Yes. I don't disagree with that view actually. Because shorting gives market a depth that it otherwise wouldn't have. Because in a crash the only people who are left to buy are the people who are short. So having short positions is a very useful thing to have. And just as the fact that you can sell stock short makes the market more give them more stability. The fact that you can set a synthetic instrument short has the same effect. Where I have been rather emphatic is in calling credit default swaps a toxic instrument. And that is a somewhat more complicated argument, which has, we have to take several steps. One is that going long and selling short is asymmetric. They are not symmetrical because if you buy a stock and you are wrong, your risk automatically is reduced. Whereas if you sell it short and you are wrong, your risk is automatically increased. And therefore it's easier, it's more advantageous to be long. That's the risk reward dynamically works in your favor. The dynamics of the risk reward calculation favor being long rather than short. And that's why in any market you've got many more long positions than yet short positions. With very few exceptions. In the case of CDS, this calculation is reversed. Because it's the buyer of the CDS that has the benefit of reduced risk and the seller that has the risk as the danger of increased risk as demonstrated by the collapse of ARG, which was the largest seller of CDS. And they thought that they were selling an insurance product. In actually they were selling bear market warrants and they didn't realize that. And they thought that the insurance product was overpriced. And as an insurance price they were right. As an insurance product they were right. But as a warrant it was underpriced as Paulson, John Paulson correctly recognized. And so did Goldman Sachs. Because Goldman Sachs was buyer. So then that's the first step of the argument. The second step of the argument is that actually bear rates can succeed. And therefore an instrument that facilitates bear rates is a very dangerous instrument. Because it can validate itself. And this is particularly true when it comes to a financial institution whose business model depends on the ability to have access to credit. And so if the cost of credit goes up the business model is in danger. And if the price of the CDS goes up the cost of borrowing goes up. And therefore an attack through CDS can be self-validating. Especially so if you combine selling short the stock and buying CDS you can in fact destroy an institution that otherwise would not be in danger. And I think that played an important role in the case of bastards and probably ribbon brothers also. Start with you. She's not Italian, she just says that. Thank you for that conceptual framework and answer. And I also read it in your book and thought about that. But I'm still confused. So basically synthetic instruments can be very useful. I mean for instance warrants, the simplest thing can be a useful form of financial instrument allowing people an option to buy. Options can be useful, fading in options. But there are dangers involved and therefore it is the duty of the financial regulator to understand those instruments and to regulate them. So I argue in favor of registering the financial instruments, the synthetic instruments just as you have to register a natural instrument, share issues have to be registered with the SEC. The same way I think synthetic instruments should also be registered. And if you have an instrument that's traded on a regulated exchange, so it's one formula, that can be registered as a class. If you have a tailor-made instrument, a design instrument, it should be registered individually because it's different from the others. And the cost and inconvenience of registering tailor-made instruments should drive the greater use of registered instruments traded on regulated exchanges. And this would greatly reduce the risks in the financial system. This is something that was ignored and left out. I think if you pointed it out in your report, I think you're doing something very worthwhile. In other words, the right way to regulate is through registering. It doesn't forbid, because if you forbid the use of, you would deprive people from having the benefits because there are benefits in having synthetic instruments. So you talked about deregulation starting in the 80s, and I think some people say it may have been going back to the 70s with the airline deregulation under Carter, but certainly Greenspan, when he became chairman of the Fed, was of the view of self-regulating markets. So it started, as you said, in the 80s, and it continued until now. So that's a reason why we're not here.

FCIC: But can you go underneath that? Is it the nature of the system?

Soros: I've asked a number of our people that we've interviewed whether the crisis was caused by a failure of a system or a failure of individual people, of men, women, not that many women, so that had there been better people running financial institutions and watching out for whether it was Citibank or Fannie or Freddie or AIG, or whether just the system itself created its own... So I think it's something else. It's the ideas or theories that guided the people that were at fault. So it's the theories adopted by both the regulators and the market participants that proved to be false. The efficient market hypothesis and the rational expectations theory. So it's really the theories that the interpretation of financial markets that the prevailing, called dogma or what's the word, paradigm, the prevailing paradigm, that is irresponsible. I can just add to that. One of the implicit operating assumptions using these theories is the existence of infinite liquidity. And when there is default risk and when there is not the capacity to do arbitrage many of these derivative instruments and many of the options and other things cannot be priced. It means the assumption was continuous markets, continuity, market continuity, and it's discontinuity that causes crashes. So the assumption is of the efficient market hypothesis that markets are continuous. Now, they are not. And you've got discontinuity. And then you have a crash. So this is how you had, for instance, a crash connected with the in 87. The portfolio insurance. Portfolio insurance is a synthetic product that was based on this false assumption of continuous markets and which then encouraged a lot of people to buy portfolio insurance, which didn't take into account the effect of so many people only portfolio insurance. So when the insurance was invoked, the market collapsed. And that's a typical example of that. In this instance, the complex derivatives were priced according to computer models and the mark to model valuation when liquidity became disrupted and the markets were continuous is a great distance from the actual price one could achieve in the marketplace. And so people in the management, you were asking about people versus systems. In the marketplace, people were assuming things on the computer model being worth, say, 96 cents on the dollar, but in fact, they could only get 20 cents on the dollar in the market. And that is the regulators look over this. If they assume that a asset is worth 70 cents more than it is, then their view of how much capital the firm has is inflated and their sense of fragility is a gross underestimate. And so the underlying mistakes in theory and assumptions led to a, what you might call, a mirage about the solidness of the firms that when the theories shortcomings were revealed in the marketplace added a great deal of anxiety to the crisis and to the propagation of the crisis. That leads to the question I had for you, Mr. Soros, which was how you feel about market to market accounting and its role in the crisis. Market to market accounting and its role in the crisis. If it had one. That's a very complicated issue because clearly the market at a time of great uncertainty tries to estimate the position of financial institutions if their assets were marked to market and if that figure is available, the uncertainty is less. If the figure is not available, then the markets are forced to market participants are forced to make their own guesses and at times of uncertainty and fear they tend to overestimate it and that makes their situation worse. So having marked to market values available would have to remove that kind of uncertainty and the stabilizer system. That's what stress, stress are supposed to do and that's why they have some value except that the methodology is not always convincing. So I think disclosure of market, of marked to market values is highly advisable. Whether then should be allowed to hold to maturity and thereby be exempt from, you know, when it comes to regulation of the capital requirements, there, that's much more questionable because that could put into, that could invoke this self-reinforcing process of destruction. Then effectively the authorities would be conducting their range on the banks if the market went down. So that's why it's very complicated. So I think having the figures available would be definitely to be advised. But how to determine the capital requirements is another issue. Now I'd like to come back to the question that you were beginning to formulate about regulation and systemic risk. And the important thing that does need to be emphasized and I haven't actually emphasized it sufficiently in my book because it wasn't called for at that time. Regulations are also inherently perfect and it's impossible to have a perfect regulatory system and therefore while markets are inherently unstable and therefore they need regulation, the regulation has to recognize that it is also imperfect and subject to regulatory arbitrage and lack of foresight on the part of the regulators. And that's what makes the task of designing good regulations so difficult and a good regulation should recognize its own imperfection. That's a very important point. Do you think that the failure to do so, if indeed there was a failure which seems to be certainly with some failure, is because of the nature of the regulatory process or because the influence of firms whose interests are not... All of the above. First of all, it's inherent in the human condition. Something sort of fundamental to understanding social and economic affairs. Second, regulations by their nature are bureaucratic and always lag behind reality. There's always a time. markets are much faster in recognizing reality than bureaucrats. Thirdly, political influences, regulations are subject to politics and the process of the financial, the pledge to the Financial Reform Act was an illustration of the defects of how regulations are formulated, how legislation is formulated. So this is what makes the situation so... The fact that markets need to be regulated doesn't mean that the regulations will do the job that they are supposed to do. In fact, they will always fail. And if this is recognized, then the regulations themselves will prove to be flexible enough that they might have a better chance of catching up with new developments. If you establish timeless, devalued rules, you ensure that those rules will be in effect. You know, we've done a lot of interviews and it's easy to become pessimistic. And listening to all of you guys, people who are at the very top of the financial industry in one aspect or another, senior regulators, business executives, hedge fund experts, managers, not one of them has said, gee, if people had only done this or that, things wouldn't have happened. Are you, I guess, do you share the view of Jamie Simon when he testified before our commission nine months ago,

FCIC: ten months ago now?

Soros: He was asked about crisis and he said, well, a crisis is what I told my daughter it was and he said it was something that happens every five or ten years.

FCIC: Is that your view? Is that there's really nothing to be done?

Soros: I disagree with you. I disagree with you. And actually I'm ready to help you formulate something. I mean, I'm at your disposal to spend as much time with you as you find appropriate to try to convey to you my understanding of financial markets because I think that it really could be helpful to throw light on, I mean, the conceptual framework that is in my books provides a better interpretation of how things actually happen than the prevailing paradigm which has failed. So perfection is unattainable. Our understanding of the world will always, there will always be a gap between our understanding and what really exists and reality itself. Since this is inherent, the size and nature of the gap is all important. So if you understand that there's always a gap, you're already ahead, you're already better off than if you don't recognize it. And the prevailing paradigm didn't recognize this. So it failed. What makes social affairs so complicated, more complicated to understand than natural phenomena is that this imperfect understanding of the participants actually influences the course of the events. It's one of the elements that you need to understand. This is what is called knightly uncertainty. Knight actually recognizes, Keynes recognizes, modern economics forgot it. They just forgot it. And since they insisted on, in natural science you can actually produce theories which are timelessly valid because it doesn't have thinking participants. Thinking introduces this element of uncertainty. And economics sought to rival natural sciences. Now natural sciences are also not perfect because scientists are not perfect. But the participants, they are not participants in natural phenomena. In economics they are participants. So the theories that economists propose actually influence how financial markets operate. So that's the point that needs to be, I think, has to be the starting point of the explanation of what happened. So I offer it. It's called the Soros Uncertainty Principle. It's a human uncertainty principle, I call it. And it's like Heisenberg's Uncertainty Principle, except that Heisenberg's Uncertainty Principle didn't change the behavior of the quantum particles. However, Soros Uncertainty Principle or the efficient market hypothesis or Marxist theory of history changes history and changes the behavior of markets. So the mere fact that hedge fund operators have read my book and recognized that markets are effective, have actually made markets more unstable. Particularly if everybody, I guess, is applying the same set of rules because then you've got a positive feedback which tends to oscillate. That's a little bit like, perhaps, like Minsky's theory. Yeah, very much so. Basically you've got feedbacks in financial markets. A negative feedback is self-defeating, brings you closer to equilibrium. Positive feedback is self-reinforcing. So a false idea that has positive feedback appears to be correct until it's done. Correct. So that's the, that is key. I frankly think that if you want to give a good explanation of what happens, you have to make that clear. And that puts everything into perspective. Then there were also abuses and so on. But it wasn't just the abuses that created the, the excesses are inherent in the system. See, when I see a bubble, I buy. So don't count on me as a market participant to prevent bubbles from, from developing. Therefore, controlling asset bubbles has to be the role of a regulator because market participants cannot be counted on because they cause it. William McChesney Martin, William McChesney Martin, a Federal Reserve chairman a long time ago said that it was his job to take away the punch ball when the party got good. And I guess we haven't had anybody who's saw their job quite that same way. I think Green Stand was on record saying that it wasn't his job to stop the bubble, but rather I guess to clean it up afterwards. That's right. And he explicitly rejected the responsibility for correcting, for dealing with asset bubbles because they said we don't have the instruments. And in fact he was right, he's right, in saying that, that monetary tools are not appropriate for controlling asset bubbles. In fact, the use of monetary tools can contribute to asset bubbles developing if you keep interest rates too low, too long as he did. It was an important factor. So you need other instruments which have been introduced after the 1930s, minimum reserve requirements, margin requirements, and you need to actually vary them. That's very important. You shouldn't set them once and for all. But your margin requirements, for instance, in the stock market were very important at one time. In other words, they really influenced how much credit you could get on securities. And they were also often changed. And actually the development of synthetic instruments was very largely to overcome the margin requirements. So regulatory avoidance is a very important function of synthetic instruments. So the Chinese central bank raised the capital requirements of Chinese banks 17 times, leading into the 2008. And they lowered it much, much more quickly than afterwards. So this should be part of the response to this crisis. You should not set those requirements once and for all because you have to recognize that monetary control doesn't control credit because of this divergence between perceptions and reality. You could have a certain amount of monetary supply and you could have a credit expansion or credit reduction depending on the mood of the market. In other words, markets do have moods which was disregarded by the efficient market hypothesis. I think you have to go there in explaining what happened. It's a very difficult task to do that. People seem to want...

FCIC: Who did what?

Soros: And preferably some wrongdoing. And there are wrongdoings, so you can find some. But I would assume that a system properly engineered should take into account that there are wrongdoings because that's the nature of people. Do you think that the situation was exacerbated by what is now called the global savings glut

FCIC: and all of those Chinese saving money instead of spending it?

Soros: I disagree with Grubman on his explanation which is a question of definitions. I think it was much more due to the Chinese government controlling the exchange rate and also the Asian countries having suffered from the Asian crisis in 1997 then building up their currency reserves and keeping their currencies down and rather building up excessive. But the IMF considers excessive reserves. That's the glut of savings. And also the carry trade has a lot to do with the glut of savings. In other words hedge funds borrowing yen and very low interest rates and using it to build up positions in Brazilian bonds. So it's a little more complicated than just excessive savings. But there was a fundamental imbalance in the sense that the Chinese were very happy or the Asians generally but the Chinese more lately very happy to produce more and consume less. And we were very happy to consume more and produce less. It's a perfect marriage. It's a symbiotic. That could have continued for a long time yet. But it was an important imbalance and it's very important now. It's really the households that because of the housing bubble that then they saved. And that's what undid the balance. By the way when you referred to the savings plan you said that you disagree with Krugman. I think it was Ben Bernanke who was the proponent of the savings plan. But I thought Krugman as the same. He agrees with you about the exchange rate plan. But it doesn't mean he has this Keynesian savings. It's a big thing. His parable of the babysitting cooperative. I don't know if you've ever read that. He's written about it in his book and it's one of his articles. He has this story about a babysitting cooperative in Washington where everybody could get babysitting credits but nobody would spend them and so nobody can then get a babysitter. And so the babysitting cooperative went into a recession basically. And he says the way you fix that, it wasn't in his last article but was in his book. He said you fix that by increasing the supply of babysitting credits so you just flood the market with excess liquidity and that frees up people to go out and have a babysitter. But Joan Robinson, Joan Robinson in the book Money had this parable of supposedly that in a German town there was a shortage of taxis. So they put in an ordinance that at every taxis station there has to be at least two taxis standing. So there's a result you couldn't get any taxis. That's unattended consequences. It's almost explained.

FCIC: Well, do you have any wrap-ups?

Soros: I don't have anything that's worthy of a wrap-up. I'm at your disposal in the future. I don't know who's writing the report. We're not sure. There's a lot of people. It's a group effort. It's a group effort. We have a lot of writers and a lot of readers. And the commissioners are also reading it. So it will be a lot of authors. Is there any parting besides you're generous

FCIC: offer of additional assistance?

Soros: Anything that you'd like to leave us with as we go back out

FCIC: into the cold outside here?

Soros: I think we touched on most of the... I think the need for regulation and the imperfection of regulations, on the other hand, is important to bring in. And I think the moral hazard is something that has a lot of myth attached to it. And I think the idea that somehow living wills or whatever will allow the failure of an institution remains unbelievable until it actually is implemented. And even then... I will see. I mean, I hope we won't see, but we might see. That's an excuse for avoiding the need for regulation. One thing that you and I have frequently discussed is that the scope of regulation enforcement and bankruptcies is now international. And so to avoid moral hazard, too big to fail firms are now global. That, I think, is worth putting on record. And that is that globalization spread like a virus, like a disease, because based on deregulation, the countries that resisted it would lose financial capital. Financial capital would escape, would go to countries where it's least regulated and least taxed, and it doesn't work in reverse. Once you recognize the need for regulation, the fact that it has to be international because we have global markets makes the task of the regulator more difficult. So globalization makes the task of the deregulator easier and the task of the regulator more difficult. And that, I think, is an important... And the other topic that we've talked about frequently is the deterioration in the quality of information because so much is allowed to be off balance sheet. Yeah, I mean, but that was a big time to collaborate. We've had a lot of people talk about that whole, you know, the special investment vehicles and the rest. But that, I think, is about it.

FCIC: Have you talked to Frank Partnoy?

Soros: Frank is a lawyer at University of San Diego Law School and he does a presentation where he shows a balance sheet and he says, look at this, this looks great. And then the next slide is the same thing, but it says Citigroup 2007, 2008 and 2009. And he basically says nothing that happened that was relevant to the crisis at Citigroup was on balance sheet. It was all off balance sheet. And he describes that deterioration very well. Well, good talk. Well, thank you very much. Thank you.