George Soros said the world financial system has effectively disintegrated, adding that there is yet no prospect of a resolution to the crisis.
Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
“We witnessed the collapse of the financial system,” Soros said at a Columbia University dinner. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”
His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to president Barack Obama. Volcker said industrial production around the world was declining even more rapidly than in the United States, which itself is under severe strain.
“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Volcker said.
Earlier, in his commentary in the Wall Street Journal, Soros had warned that setting up a “bad bank” to absorb toxic assets of troubled US lenders – a move the Obama administration is debating – would be an error on political and financial grounds.
The process would lead to difficulties in valuing toxic securities and generate covert subsidies for affected banks, generating “tremendous political resistance to any further (bailout),” Soros wrote.
The US administration is thought to be considering creating a government entity to take toxic assets off banks’ balance sheets as part of a $900 billion stimulus package of president Obama.
European leaders are reviewing similar options – already under discussion by the German, British and Dutch governments – and will take their proposals to April’s G20 meeting, European Union economic chief Joaquin Almunia had said.
Soros said he favoured putting toxic assets into a ‘side pocket’, where the appropriate amount of capital – equity and unsecured debentures – would be sequestered.
This would cleanse the banks’ balance sheets while leaving them undercapitalised.
“The same $1 trillion that is now destined to fund the (US) bad bank could then be used to infuse capital into the good banks,” he wrote.
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