SPIEGEL Interview with George Soros 'The Economy Fell off the Cliff'

George Soros, 78, has made billions as a hedge-fund manager and investor. SPIEGEL spoke with him about the current financial crisis, how he expects President-elect Barack Obama to respond to the economic disaster and the responsibilities borne by speculators.

SPIEGEL: Mr. Soros, in spite of massive interventions by governments and federal banks the financial crisis is getting worse. The stock markets are in free fall, millions of people could lose their jobs. More and more companies are in trouble, from General Motors in Detroit to BASF in Ludwigshafen. Have you ever seen anything like it?

Soros: Never. I find the present situation dramatic and overwhelming. In my latest book “The New Paradigm for Financial Markets: The Credit Crisis of 2008” I predicted the worst financial crisis since the 1930s. But to tell you the truth: I did not actually anticipate that it would get as bad as it did. It has gone beyond my wildest imagination.

George Soros has made a fortune with hedge funds. "I find the present situation dramatic and overwhelming."

George Soros has made a fortune with hedge funds. "I find the present situation dramatic and overwhelming."

SPIEGEL: What are your fears for the coming months?

Soros: I think that the dark comes before dawn. The financial markets are under great pressure because of the lack of leadership during the transition period. In the next two months, the markets will experience maximum pressure. Then we will see some initiatives from the Obama administration. How long the crisis lasts will depend on the success of these measures.

SPIEGEL: The markets don't seem to have much confidence in the new president -- in stark contrast to the enthusiasm in the population. Since Election Day on November 4, stocks have fallen by almost 20 percent.

Soros: I have great hopes for Barack Obama. But at the time of the election the financial community had not yet fully grasped the magnitude of the economic decline. They did not anticipate that the default of Lehman Brothers would cause cardiac arrest in the markets. The economy fell off the cliff, you begin to see mangled bodies lying at the bottom.

SPIEGEL: Was it a policy mistake to let Lehman Brothers go bankrupt?

Soros: It was a fatal mistake. I would have never expected that the authorities let such a big investment bank go.

SPIEGEL: Will there be more victims?

Soros: Possibly. CitiBank, one of the world’s largest banks, is currently at the center of attention (eds. note: The $300 billion US government plan to stabilize CitiBank had not been approved by the time of this interview). There are some other bodies lined up for potential trouble. The situation is very similar to the 1930s -- but it is going to unfold differently. We have learned not to allow the financial market to collapse. We will spend all the money in the world to prevent that from happening.

SPIEGEL: Obama is supposed to save the banks, bail out the auto industry and boost the economy in general. Can a single person ever live up to such high expectations?

Soros: Perhaps not, but the problems can be handled much better than they have been by the current administration.

SPIEGEL: Currently, Treasury Secretary Henry Paulson is in charge of the bail-out. What are your misgivings about his performance?

Soros: He reacted to problems as they arose; he had no capacity to anticipate them. When he allowed Lehman Brothers to fail, the breakdown of the financial markets found him totally unprepared. He went to Congress not with a plan but with a plan to develop a plan. And the plan he had in mind -- to purchase toxic assets -- was ill-conceived. Injecting equity capital into the banking system made much more sense and he eventually came to see that, but again he went about it in the wrong way. Then he stopped doing anything, leaving a vacuum in leadership, and the markets collapsed.

SPIEGEL: What are your expectations for the next Secretary of the Treasury?

Soros: I think we need a large stimulus package which will provide funds for state and local government to maintain their budgets -- because they are not allowed by the constitution to run a deficit. For such a program to be successful, the federal government would need to provide hundreds of billions of dollars. In addition, another infrastructure program is necessary. In total, the cost would be in the 300 to 600 billion dollar range.

SPIEGEL: In addition to the $700 billion bailout for the financial industry?

Financial manager George Soros worries about a leadership vacuum during the transition from President George W. Bush to President-elect Barack Obama.

Financial manager George Soros worries about a leadership vacuum during the transition from President George W. Bush to President-elect Barack Obama.

Soros: Definitely. I think this is a great opportunity to finally deal with global warming and energy dependence. The US needs a cap and trade system with auctioning of licenses for emissions rights. I would use the revenues from these auctions to launch a new, environmentally friendly energy policy. That would be yet another federal program that could help us to overcome the current stagnation.

SPIEGEL: Your proposal would be dismissed on Wall Street as "big government." Republicans might call it European-style "socialism."

Soros: That is exactly what we need now. I am against market fundamentalism. I think this propaganda that government involvement is always bad has been very successful -- but also very harmful to our society.

SPIEGEL: Would you advise the new president to say that publicly?

Soros: He has already spoken about changing the political discourse. I think it is better to have a government that wants to provide good government than a government that doesn't believe in government.

SPIEGEL: However, even a strong government can't perform miracles. It needs money from the taxpayers. There is a lot of talk in the US about the new role of the state and the government -- but no one seems to be willing to pay for it. Obama has announced to cut taxes for 95 percent of working Americans. Isn't that a contradiction?


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