Billionaire financier George Soros told the Davos forum on Saturday that financial markets were still poorly understood despite moves to limit more complex products after the crisis.
Soros told a packed audience of the world’s business and political elite in the Swiss ski resort that the established theory of how markets functioned “had collapsed.”
“The unfortunate fact is that … we haven’t actually got a proper understanding of how financial markets operate,” said Soros, who made his fortune, estimated by Forbes Magazine at some $19 billion (14 billion euros), gambling on the markets.
“Now we have introduced synthetic instruments, invented derivatives where we don’t fully understand the effect they have,” added the 82-year-old, referring to complex financial products.
He compared the current moves to restimulate the global economy to actions required to stop a car skidding out of control.
“When a car is skidding, you first have to turn the wheel in the same direction as the skid to regain control because if you don’t, then you have the car rolling over,” he said.
Therefore authorities responded to the debt crisis first by injecting more credit into the economy — notably by supplying cheap loans to banks in Europe and with the US Federal Reserve’s policy of pumping money into its system.
Soros said that these actions had stabilised the markets, but the priority now was to steer the economy back to growth.
Returning to the car metaphor, he said: “You first regain control and then you correct the direction.”
“The first phase of the manoeuvre is pretty well complete, but the second phase we haven’t yet started,” he said.
The crucial operation of reversing the process of liquidity injection by mopping up excess cash in the economy was essential but “probably impossible” for central banks to decide when best to do this, he explained.
Given this, he forecast “a period of go-stop” for the global economy, which, he quipped, is “far superior to no go at all.”