The New Global Economy
The Road from Depression
George Soros
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NEW YORK – Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control, and they need to do so now.
Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under the direction of the European Central Bank in exchange for a temporary guarantee and permanent recapitalization. Third, the ECB would enable countries such as Italy and Spain temporarily to refinance their debt at a very low cost.
These steps would calm the markets and give Europe time to develop a growth strategy without which the debt problem cannot be solved. Indeed, the importance of developing a growth strategy cannot be overstated, because the debt burden – the ratio of debt to annual GDP – rises and falls in part as a function of the rate of economic growth.
Since a eurozone treaty establishing a common treasury will take a long time to conclude, in the interim the member states must appeal to the financial authority that already exists, the ECB, to fill the vacuum. In its current form, the embryo of a common treasury – the European Financial Stabilization Facility – is only a source of funds; how they are spent is left to the member states. Enabling the EFSF to cooperate with the ECB will require a newly created intergovernmental agency, which will have to be authorized by Germany’s Bundestag and perhaps by other eurozone members’ parliaments as well.
The immediate task is to erect the necessary safeguards against contagion from a possible Greek default. Two vulnerable groups – the banks and the government bonds of countries like Italy and Spain – need to be protected.
To accomplish these related tasks, the EFSF would be used primarily to guarantee and recapitalize the banks. Systemically important banks would have to agree with the EFSF to abide by the ECB’s instructions as long as the guarantees are in force. Banks that refuse would not be guaranteed, but enough would agree to provide the ECB with the required critical mass.
The ECB would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own accounts. These arrangements would stop the concentrated deleveraging that is one of the main causes of the crisis. Completing the recapitalization would remove the incentive to deleverage, at which point the blanket guarantee can be withdrawn.
To relieve the pressure on the government bonds of countries like Italy, the ECB would lower its discount rate. It would then encourage the countries concerned to finance themselves entirely by issuing treasury bills – and encourage the banks to buy them. The banks could rediscount the bills with the ECB, but they would not do so as long as they earned more on the bills than on the cash.
These measures would allow Greece to default without causing a global meltdown – which does not mean that Greece would be forced into default. If Greece met its targets, the EFSF could underwrite a “voluntary” restructuring at, say, 50 cents on the euro. The EFSF would have enough money left to guarantee and recapitalize the European banks, and it would be left to the IMF to recapitalize the Greek banks. How Greece fared under these circumstances would be up to the Greeks.
I believe that these steps would bring the acute phase of the euro crisis to an end by staunching its two main sources (weak banks and vulnerable sovereigns) and reassuring the markets that a longer-term solution is in sight. The longer-term solution itself would be more complicated because the regime imposed by the ECB would leave no room for fiscal stimulus and the debt problem cannot be resolved without growth. How to create viable fiscal rules for the euro would be left to the treaty negotiations.
Many other proposals are under discussion, because officials now realize that “kicking the can down the road” has brought them to the end of the highway. Most of these proposals seek to leverage the EFSF by turning it into a bank, an insurance company, or a special-purpose vehicle that takes the riskier tranche of a public-private partnership. While practically any proposal is likely to bring temporary relief, the financial markets are just as likely to see through them and find them wanting, especially if they violate Article 123 of the Lisbon Treaty (the no-bailout clause), which my proposal scrupulously respects. That said, some form of leverage could be used in recapitalizing the banks.
The course of action outlined here does not require leveraging or increasing the size of the EFSF. But it is more radical, because it puts the banks under European control. That is liable to arouse the opposition of both the banks and national authorities – opposition that only public pressure can overcome.
George Soros is Chairman of Soros Fund Management and of the Open Society Institute.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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Zsolt 10:40 29 Sep 11
I have no specific knowledge in economy or financies, so I cannot comment on the steps Mr. Soros is recommending.
But still there seems to be a problem, all those recommendations do not have a foundation.
Why would the countries, especially the voters of the well off Northern European countries would agree to such steps?
And even if we scare them with the fall of the Euro, or with the destabilization of Europe, it is easy to predict that each of them would think it will not affect them, they can pull through based on their strong economy, their working ethic, culture, education, etc.
How many people actually feel the "coming depression" on the streets?
Just look at people driving expensive cars, buying everything they can still buy, when there are demonstrations the demonstrators are either "criminals" like in London and Berlin, or "young rich kids" who want some romantic action like in NY, or Tel Aviv, or people fighting dictators like in the Arab countries, or following some fasting guru opposing corruption like in India, etc...
Poeple still do not make the connections, they still do not understand the intricate relationships in between us, how much every little action affects all the 7 billion inhabitants of this planet.
Until everybody, from the American presidential candidates to the most ignorent voter somewhere deep in Europe and beyond starts to understand what it means to exist in a global, integral, interdependent world, nobody will take bold steps until the great depression, and worse problems are upon us.
That is why first we need to build the foundations with global education, showing people with clear examples how much we are connected to each other, how much the individual's every day food and drink depends on the whole system being in balance. If we had that foundation, than we can start building on it with bold, specific steps.
rebentisch 11:01 29 Sep 11
The debate is now "open", different options have to be considered. Muddling through is risky but winning time helps. "The authorities, particularly in Europe, have lost control of the situation. They need to regain control, and they need to do so now." They are in a broad scale process of regaining control. Keep in mind that former Commissioner Charlie McCreevy liberalized the financial markets.
Andrewp111 11:33 29 Sep 11
Soros ir right that the end of the highway is near, but his remedy is wrong. His remedy is just more can kicking. Instead of protecting the TBTF banks, they should protect the little guy instead. Let the TBTF's go under, and liquidate everything. Once most debt is destroyed, the economy can recover. The US and EU governments should only bail out the little guy that get's hurt by the collateral damage.
gamesmith94134 12:45 30 Sep 11
Gamesmith94134: Outraged European Citizens
Based on the recent fiasco of sovereignty debts in PIIGS, it has tilted the balance of the equality and autonomy that created the civil war within the European Union. After the series of defaults on the loans, austerity programs many applied did not concur with IMF or Moody who gave negative result in matching the demands; treatment on higher interest payments added on the loans for PIIGS after the rating and privatization program was advised and enforced that put its citizen hostages.
I would suggest the zoning on prevention on the hot cash and tax evasion that each zone will have substantiate the standardized exchanges that each must carry its own bonding if necessary and fee on the transcontinental exchanges. Under the shadow of the Lehman Brothers and the failing equity bonds under the appearance and insurance of the Central banks, it needs a guarantor and an arbitrator from the World Bank and a valuator on the exchange like IMF.
Perhaps, bonds that carries over the intercontinental transaction should be scrutinized and settled through the third party medium like World Bank if such transaction is see as part of the sovereignty debts or loan since some may surpass the regular board of securities exchanges of the local central banks; or such transaction would be considered as the laundry like elements that requires policing
The division of arbitrator of World Bank should have taken an advanced procedure safeguard of economical crashes if such lesser of long term investment and creates vacuum by the outflow. Such transaction should use the World Bank to guarantee these transactions are genuine investment instead of laundering purpose or act of trade war that harms the exchange currency nations or parties. Again, these transactions must pay by reserves on the value it acclaimed, or a checkpoint must be established on the transcontinental purposes instead of the later court action in disputing the rightful bearer of the devalued bonds or loans.
World Bank must develop it insurance element and the appraisal power to adjust to the need of the abused including sovereignties debts if World Bank may act in the loaner position that after the central bank failed. It must establish the reserves on the funds in handling the transaction and not by the insurance company or appraisal firm that either failed to see the loophole of the fraud or defiant act on the truth in just collecting fees to pass on like kicking the can down the road like PIIIGS, eventually, it may comes as part of the function amending the global economy that World Bank will offer the loans through the reserves it may developed from the guarantee commission or appraisal commission.
In term of losing track of the transaction that goes through the protective elements, many use the political power through the governments, many of these transactions concealed national secrecy that would not be taxed or revealed by the bankers or receiving parties. So, in order to set a proper track record of these transactions, they should be regulated under IMF or the board of intercontinental exchange which is identified by its Zone. So, the transcontinental transaction must come in the checkpoints or IMF, a fee of authorization would use as tax or tariff that comes through each checkpoint and reported to the involved parties to reestablish the sovereignties right to tariff and tax.
Offering of the World Bank and IMF to boarder service can be a helpful way to ease the tension from dragging on to the global recession if there is no better alternative for the change of guard of the world economics. Now, it is the calls of World Bank and IMF to take the stand to work within the sovereignties that carry its own currencies and controls all transactions in the fairer trade within its continents while free trade had reaches the epic of manipulation.
In term of currencies, I think after each sustains its sovereignty, the non tradable sector can use the local currencies which can be supervise under the scrutiny of OCED and EU can control itself under the ruling of the World Bank. However, each may join or utilize the EU Euro, British pound, and Russian Rubles in the tradable sectors can achieve the collective bargain in the open trade markets. Perhaps, WTO could cut monopoly or abuse from diversification of limited currencies in the open trading market and each can contribution to the integration of globalization and being monitored by the global security.
Perhaps, the theory in the half full and half empty may put in use of the price and value of the currencies refreshing the preset EU system that each may return to its own sovereignty that gives the flexibility and elasticity on the monetary and political system to sustain the growth in a multispeed world.
May the Buddha bless you?
slightly_optimistic 10:44 30 Sep 11
"These steps would calm the markets and give Europe time to develop a growth strategy without which the debt problem cannot be solved. Indeed, the importance of developing a growth strategy cannot be overstated"
Europe has been busy. The EU Parliament has this week approved new powers which apparently allow oversight of member states' budgets, economic policy priorities as well as on labour and social rights - not merely for countries with high trade deficits, but also those running current-account surpluses.
However sustainable growth is something the EU and the US would surely have to argue for at the G20.
Tony 10:51 01 Oct 11
Hi Zsolt, you are right that education is necessary to make the real change. To make the education successful, it needs to be coupled with population policy. Population should not be allowed to grow faster than increase in our capacity to provide sufficient education (quantity and quality).
This can be achieved by 'Rich pay poor for not to give birth', which self-regulates the population, consumption, rich-poor gap, and makes the provision of education within society's capacity.
The challenge is to use the ongoing global crisis as a turning point to advance the humanity from quantity growth to quality development, the essence of progress.
Build a global shared vision. This build the commitment for real change. Leaders should lead.
Share vision, get committed, improve ourselves.
Tony
http://think4sustain.wordpress.com
jelohman 04:00 01 Oct 11
There is only one cause and only one fix for our economic problems: Political corruption! Nothing will change until we eliminate it with public funding of campaigns. The Fat Cats demand lower taxation, which provides lower revenues to offset the higher government spending that made them so rich. And THEY fund the elections, so don't even think about working on the small fires.
And George Soros should know better than anyone. If he wants to fix the problem and continue walking freely in public, he should use his money to clean up the system.
Jack Lohman ...
Tony 03:52 05 Oct 11
Hi jelohman, then why do politics corrupts? Why democracy still becomes oligarchy eventually, even though we have designed democracy institution? The iron law of oligarchy says that any political system eventually evolves into an oligarchy. This has happened many times in history.
I think the reason is increasing gap of human quality. Democracy requires well-educated voters, who can perform critical thinking. Therefore public education has to be sufficient (quantity and quality). If society don't have enough capacity to support sufficient education, then birth rate should be controlled. It is either we manage (control) ourselves to the vision we desired (desired outcome), or let nature run its course (which may not be pretty).
Share vision, get committed, improve ourselves.
Tony
http://think4sustain.wordpress.com
jelohman 02:48 05 Oct 11
Tony, political bribes are the best and quickest way to get to an oligarchy.
gamesmith94134 07:11 06 Oct 11
gamesmith94134: the road from Depression
George Soros pledge for Millennium Villages project will help 500,000 people in 10 countries meet UN development goals. George Soros gave $50 million when the project launched in 2006.
Thank you for the funds in opening the land of Africa, your love is always in theirs.
RobJones 05:49 08 Oct 11
The euro crisis is just the latest symptom of deep, fundamental problems in the banking system. These same problems caused the US subprime debacle and unless they are fixed, we are just going to experience one banking crisis followed by another.
First, consumer banking needs to be completely separated from investment banking. Bad investment banking decisions should not be allowed to crash the consumer banking system.
Second, derivatives like credit default swaps should be completely banned because they provide a false sense of security which encourages banks to make risky investments.
And finally, securitization of loans should be banned because it encourages banks to make bad loans, knowing that they can be passed off to some other bank or investment group. The risk for a loan should stay with the bank that approved it.
From the 1930's until the 1990's, the US had a set of sensible laws in place that encouraged banks to act responsibly. And in that period we never had a banking crisis which in any way compares with the ones that we are currently experiencing. As soon as we deregulated the banks the banking system descended into chaos.
I think that it was the euro's misfortune that it was implemented just at the time that the banking system went out of control. If sensible banking rules had been in place, perhaps a lot of the problem loans would not have been made and everyone would now consider the euro to be a great success.
Don't let all these articles on how to fix the current crisis distract you from the most important problem, which is how to fix the deeply dysfunctional banking system that is producing these problems in the first place.
MartynasKriunas 01:39 12 Oct 11
Great article. Soros is spot on, but the track record of EU leaders does not give great confidence about their ability to deal with this crisis.
bvnshah 08:33 14 Oct 11
Greece,Spain,Portugese and Italy needs growth and growth is not possible by monetary injections only. Growth in this cometitive world where leading Asian countries are breathing down the neck of developed world will make life more misreable for PIGS. To come out of this rut, these countries need innovation & knowledge. At this stage it looks like a very difficult proposition.
Anumakonda 01:01 16 Nov 11
Great article on world economic Depression and measures to control it.
Dr.A.Jagadeesh Nellore(AP),India
gamesmith94134 06:07 10 Jan 12
Gamesmith94134: Islamic Finance Unbound
Craig,
No one will buy more of CDS, or CDO. If ECB cannot get 900 billion Euros for its bonds in the coming months, E U will collapse. What is wrong with Islamic financing or would you prefer donation from BRICS?
I am positively sure you will not accept its 50 percent losses on their Greek bonds to help pay for the bailout since. I think such act is more like the Seppuku (colloquially hara-kiri"belly slitting") is a Japanese ritual method of suicide, practiced mostly in the medieval era, though some isolated cases appear in modern times. The ritual is part of bushido, the code of the samurai. Are there Samurais for European Union Empire?
Consequently, I think the dollar will go down as well without euro, then, many want their assets in Chinese or Japanese, and stagflation will rise. The pipeline from FED to ECB will erupt even FED cut it exchange rate and the euro is already down to 16-monh lows against the dollar. How is the Franco-German plan to dump its gold for dollar? Now, the present banking in Eastern Block and Asia suffer the outflow cash and a credit crunch; I just want a confidential vote on the bonds in asset or equity backed currencies to stop further erosion of financial system if the firewall is not prepared in the following months. What if the euro evaporated?
May the Buddha Bless you?
gamesmith94134 06:08 10 Jan 12
Gamesmith94134: global finance’s Supply-chain Revolution
“Open feedback mechanisms ensure a supply chain’s ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up.” It was because there is no firewall available during the crisis, and the pipeline was open with few operators in the financial control like Mr. Sheng said, also, there is even fewer currencies like Euro-dollar only was available in most transactions, even though the public funds like sovereignty debts were being privatized in the open trade, and it create the explosion by volume in sum of money was credited. Firewalls I took off the technical terminology means there is no safety transitory zone established physically, that our financial system allowed the flow in the supply chain freely as the computerized transaction allowed, and there is less time available for reexamination on lack of control, source of origin, birth of credits.
Especially, when the parties took the international reserves for granted that Fed and ECB cut it interest rates to its minimal for the non-inflationary measure that many would consider money are free if they can beat the time. Generally, the 22 players turned the international financial market into their casino. When their governments were the ones who called to upbeat its economies from the recession after the expansion of the debts hitting it fiscal ceiling, and the slow down cut their productivity in near recession. At the same time, the rigid exchange rate went lopsided that created the tension between the debtor and creditor. It exploded.
At present, the financial system must evolve itself with firewalls that stop contagion of the collateral damage over the money with no backing, and shrink the pool of cash for credit lending. Some might call it deleverage of the past 20 years mishaps, or change of climate in our global financial that the supply-chain must stop and check itself; besides, most of us would know by now that money supply and productivity are not on the same parallel at certain point under the influence of inflation an deflation. Without the assurance of the balance payment or imbalance of its exchange rates, the supply-chain will reverse itself.
Perhaps, I like it better if the sovereignty debt and private investment should not be classified as same in enjoying the low interest rate, that sovereignty debt should be handled separately by the Central Banks and World Bank if it does affect the exchange rate when evaluated by IMF for it answer to lack of control.
Transfer Unions must be established to void unsafe transaction and the Trans-continental Zoning to confirm the source of the origin on all transactions when the transaction is registered to enter its zones, or cut hot cashes that undervaluing ones currency from another that influences the international currency exchange rate. Besides, I see the floating rate system is a joke if it put sovereignty in defensive; and it should go with its yardstick like performance that values at each quarters.
Finally, international banks are “too big to fall” should became a legend only, and they must be downsized that international is not licensed to evade sovereignty. There are more of reforms available in regional account and obey to safety net where it allows. Perhaps, if the banker can purchase these sovereignty bonds and metro bonds from the central bank like FED or ECB instead of chasing the wild goose in the open market; the general public can have some credits available for doing business.
If someone question on the equities dealing among the banks, why only the politicians who talk over the policy on financial and there is no financial police system to oversight the banking as a whole. I think the United Nations Security Council can build a better division on financial security than G7 or G20, and it is inclusive for the globalized finance and my past experience tells me so. Evolve or not, we may stand by and watch the outcome of our present crisis and it not over yet till everyone would feel safe from hegemony through these firewalls. If some suggest cooperation from community in forgiving ones’ debt, it would be worse than my New Year project in losing weight every year, and I have been laughing at myself all my life. Without firewall in safeguard one’s wealth, each would isolate itself from contagion for a long, long time.
May the Buddha bless you?
priceofgold 04:57 08 Feb 12
I think we are headed for another great depression. The Euro looks like it's on the verge of collapsing. And the federal reserve is printing money like there is no tomorrow. They are giving low cost loans to the European Union as a bailout. This will result in the debasement of the United States dollar. That means the more the United States dollar is printed and loaned out, the higher our food costs, the higher our commodity costs. I see food supply problems and more people without jobs and a place to live.
Rachel, Editor, http://goldpriceperounce247.com
gamesmith94134 05:32 08 Feb 12
Gamesmith94134: Seizing Sustainable Development
In seizing the sustainable development, we must have a foundation of value and equity we can depend on. As a strategist on financial, I see the coming year prior 2015, the southern hemisphere is great destiny on the long and short term goal. Since the European Union is in turmoil and uncertainty with indecisiveness to return to its sovereignty rule, and ECB is taking a paternal rule on the political and financial system over the European developed nations; I see the dyke is not holding and must pay its prices politically and socially that its populace would not continue to owe more debts without consequences. Recent financial pipeline is flowing to “The South” after the emerging market nations withdrew their funds from the European Market and reinvested in the African Nations and South America. This trend will last till 2015 or till the ECB or FED would reconsider to alter the 1% short-term and 1.9% over the ten year longer-term bonds. I can see more of the emerging market nations are shifting their investment to The South to develop light industries and cooperate to secure the native resources from agribusiness to mining. Now, all it need is the system to ensure the fruitful result afterward, and technical transfer to these regions can give equity and value to the land and its people, and restore the political system in a sound and solid state to protect the investment and stop corruption.
It seems that it is your post on the African Union now, Mr. Zuma, to hold the African nations responsible in making it works. Since the developed nations are not humble by their childish play with their Euros and dollars, it is your moment to stand up and be counted, and I doubt if the BRIC can ignore the strength of the Johannesburg and Dubai in handling the Foreign or Currencies Exchanges if the present status quo in developing nations is not sustainable.
In my estimate 7% growth in the present investment in Africa may not be foolproof, but the success rate is much depended on its labels, ‘made in Africa’ or ‘imported from Africa’. In addition, sovereignty is another significant point to its power structure and union; then, it would demand a lot of efforts of the African nations to sort themselves out to sustain unity and cooperation to fill out the shortage of food and resources order to the world in 2020. Technology transfer and science are available to apply; only if you can open its land through the transparency and efficiency, and free of corruption and dependency. I can see grains are packed in sacks; clothing comes in packages that go into the cargo ships arriving to the world.
“Made in Africa” and “imported from Africa” is not a dream; all it needs is the union of African Nations. With the supply line of the financial and human capitals to Africa or South America, your bargains on technology transfer and tactical advancement, it was time God given in his balancing act of inequality and inequity to the world. This is a sustainable development in the southern hemisphere; and this is the moment of “The South”.
What is your plan now to seize the sustainable development in South Africa? Perhaps, it depends on your selfless diplomatic skills on the Unity and transparency to show the world how they may see ‘The South”.
May the Buddha bless you?
Markgold 08:47 14 Feb 12
Mr Soros,
I truly respect your opinion. With the current credit swap bailout that the United States is lending to the European countries, won't this effect the value of our dollar? If we hand out dollars, i believe then the prices for our food and gas will rise. What is your expert opinion on this? how long are this credit swaps going to be offered to the European countries? - Mark gold, Publisher, http://silverprices247.com
karen123 01:52 23 Feb 12
Excellent post, I wonder if you can take control of big mind like a group.
gamesmith94134 06:56 29 Sep 11
Gamesmith94134: Catching up is so very hard to do 67
Justlistenall said well, ”how about “nations of higher living standards” in lieu of “rich nations”, except for those who really qualify as such?” It was not the yuan or GDP that make China the emerging nation; and the fact is the affordability that gives impetus to growth and not the higher living standard.
If the rich nations must catch up the up-ward growth spiral, they must cut their living standard to make its people live to grow, instead of, strive to survive. The rich nations are only think of their people are rich but they are not; not afford to consume make its economies anemic. If they want to catch up, they must make it affordable for their people.
Even if the troika can get 2 trillion to cover the PIIGS, the onward slow or anemic growth is not getting to the level of the proportion on the normalcy. In addition, the solution is short of the fiscal and tax equation among its EU members. Then, the 2 trillion would be spent in vain if the present higher living standard does not meet its affordability level, then, there is no demand to consume. It is still no growth if the durables or oil do not go down enough to provide the cash flow that will change the marginal affordability level and ready to consume.
The bank or central bank may free of the old debts with the fresh new debts like the 2 trillion with longer term bonds with low interest, however, the low rate will halt lending to commercial based on the non-profitable, eventually, it will die or go bankrupt itself unless banking cut its own size like BOA or JPM. Such condition will turn into another tourniquet to the commercial needs if the bonds are not restructured by 2013 with the short-term basis. Depression will become inevitable even the BRICS can help to restructure the loans.
Inflation and deflation is much as virus in fever and cold to one body as it is to an economy; it is understandable that disease works with one’s body to create its anti-biotic to fight diseases. Now, what our economist is facing the anemic economy with too much of sterilization with sub-prime and long-term interest rate that the body or the economy will not respond till the inflation or deflation can take its effects to make the economy change.
In order to face reality, EU and US must settle on the coming depression, deflation helps in cutting the cost of living in a down turn spiral till the private industries can use human capitals in a lower valuation in wages. If the affordability allows more consumption; then, production will rise. Eventually, growth comes only after there is demand of it.
If there is no systematic cut the valuation of the present, and the lowest interest of today only make the financial industry suffers. Let the nature take its course to adjust. Any attitude like no on my watch can only make it-- Japanification.
If th economy is immune to inflation or deflation, then, valuation on price is not valid. I was not surprise if gold can fall 6% in a day; and how about you, Soros? What is you gold standard of monetization if immunization stands?
Anything else is just excuses, isn’t it?
May the Buddha bless you?