On George Soros and Keynes

This is going to sound very conspiratorial so it\’s an observation, not an insistence that this is some new found truth.

On Friday evening, as another great economic conference got under way here to debate the current crisis in the international economy, organised by the Institute for New Economic Thinking, which has liberal hedge fund king George Soros as its prime mover and shaker, Keynes\’s farewell speech seemed ominously prescient. The dragons are back. In Washington, a resurgent Republican party took the American government to within two hours of being closed down for lack of politically authorised funds as it battled for swingeing cuts in federal spending. Across the Atlantic, an army of hedge funds and investment banks forced a lame-duck Portuguese government to turn to the IMF and European Union for a multibillion euro bail out. In Britain, George Osborne championed the breathtaking speed of his budget reduction plan by saying he would not play Russian roulette with British economic sovereignty. Everywhere are the echoes of the language Keynes tried to dispel at Bretton Woods.

The general policy prescriptions from that New Institute seem to be working along the lines of a new Bretton Woods. You know, a New International Order, arrangements, things like, erm, the Euro, international instead of national currencies, management of trade balances.

One way to look at it would be the wet side of the International Great and the Good creating jobs for the International Great and the Good to do. With a bit of filling out the job applications while they\’re there.

But what rather fascinates me is the influence of George Soros in all of this. He\’s certainly a successful hedgie, and I admire him for that. Having the clarity which enables one to see the underlying economic reality (say, of the EMS and the absurdity of the UK trying to be part of it) and position oneself for the inevitable crash of the political structuring is indeed admirable. Even to cause the crash and return to economic reality by one\’s actions.

He\’s also give away great gobs of money to all sorts of good causes. I wouldn\’t say that I particularly agree with all of his causes, I certainly do agree with the aims of some of them, but it\’s his money not mine anyway.

But here\’s the bit. As a hedgie, what you really want is one way bets. Proper open and free markets don\’t offer those, at least not very often. You need a mass and collective delusion (and you have to be sharp enough to know that it is one) to get a one way bet. Which means that more of them appear in the grand plans of politicians than they do in open and free markets.

Soros\’ famous making a £billion out of the Bank of England wouldn\’t have happened, couldn\’t have happened, if the government wasn\’t trying to fix the exchange rate.

Which leads to the observation. Here we\’ve a very successful hedgie funding people into arguing for the sort of system, one with managed, politically managed, exchange rates and the like, exactly the sort of environment which offers at times the one way bets that successful hedgies make fortunes from. When the politicians try to defy the markets, it\’s those very hedgies which break the pretentions of the politicians and where the hedgies make jet plane type sums of money (umm, actually, entire airline style sized amounts).

So isn\’t that interesting? The political and economic outcome of a hedge fund manager\’s generosity is an environment in which hedge fund managers can and will make pots of moolah.

No, I\’m not paranoid enough to belive that this is the motivation for it all: just think that it\’s an interesting thing to note.

18 comments on “On George Soros and Keynes

  1. Tim, I think you need to put down the Mancur Olsen and step away from the Public Choice text books, its beginning to make you sound crazy.

    Plus there’s the very real correlation between the existence and success of hedgefunds and international monetary systems.

    With post ’73 floating system with have lots of hedge funds, with pre’73 fixed we had less. Correlation =/= causation blah blah, but still.

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  3. Soros? To paraphrase the 18 & 19th Century poet Edward Young; “For his own breakfast he’ll project a scheme, Nor take tea without a stratagem.”

  4. mmm…just tracked over to Left Outside’s website….no room for comments there, good Stalinist that he is. An astonishing series of posts based on ….sod all. A trend line of growth and how it then declined after 2008 proves that being so heavily dependant on finance industries makes the UK ec0nomy unstable. He claims to be in higher education. I wonder where? The depth of his analysis is that of a pole-dancer. I suspect the Murph-meister would think it lacking in rigour. Draw a straight-line and if growth is less than that, blame the finance industry. That’s his contribution to the debate. We need other industries…..so where are they to come from oh great guru, given that more and more of our big companies are now run by non-Brits and that we have had to move out of so much as the rest of the world came in at a later stage of the long-run cost curve.

    Tim adds: He’s as the same place I went to. So perhaps he’ll get better?

  5. You can make a straight line out of any data if you’re careful to only take two points (three if you choose the graph paper wisely).

  6. Of course it makes Tim sound slightly crazed (rather than actually ‘crazy’.) Which is why he prefaced it with:

    This is going to sound very conspiratorial so it’s an observation, not an insistence that this is some new found truth.

    It is, however, a perfectly good observation – famous and successful x is pleading for politicians to create circumstances where, according to a perfectly valid reading of the plea, it will be easier to be a successful x. Pure Bastiat.

  7. Why should it sound conspiratorial, sounds like a perfectly sensible game plan to me. That is, if making large sums of money from the taxpayer on the back of clottish governments is “sensible”. But it is profitable.

  8. “mmm…just tracked over to Left Outside’s website….no room for comments there, good Stalinist that he is. ”

    Huh?

    http://leftoutside.wordpress.com/2011/04/05/banking-and-finance-in-the-uk-made-easy-how-can-we-make-people-make-banking-safer/#respond

    I think you’ll find that is a link to a “comment” box. Stalin? Stalin? Stalin was against comment boxes? That’s a new one.

    And my university? That would be LSE, Timmy’s old haunt.

    And based on nothing? No based on Haldane’s report for the Bank of England, that well known Trotskyist outfit.

    http://www.bankofengland.co.uk/publications/news/2010/036.htm

    Recommended reading on finance in my view.

    Why of why do right wingers defend the finance industry!? They are not entrepreneurs, they are not independent, they are subsidised up to the eye balls. Jay-sus.

    “Draw a straight-line and if growth is less than that, blame the finance industry. ”

    But…but…but, we just had a financial crisis! The financial sector and its employees aren’t to blame at all? Pffft.

    “We need other industries…..so where are they to come from oh great guru,”

    I don’t know, that’s what entrepreneurs are for.

    Perhaps rather than a subsidised financial sector which oh-so-libertarian right wingers adore we should let somebody find out what we are good at.

    Finance can help allocate capital and investment more efficiently, but I don’t think that the macroeconomic risk associated with it are worth the small improvements to long run growth a crisis free financial sector are worth it because the financial sector is never crisis free. This paper from Vox is very good.

    http://www.voxeu.org/index.php?q=node/6328

    The cliches are true, every lefty thinks righties are bad, and righties think lefties are stupid. I’m not stupid, but I’m not sure your name calling is doing much to counter my perceptions.

  9. “The crisis was global, and the UK, with its large financial sector, was badly affected. National output in 2010 was 4.5% below its level in 2007 and 10% lower than if growth had continued on its pre-crisis trend.”

    Where’s that from? My blog? Nooooo. The Executive Summary of the Independent Commission on Banking’s Interim Report. Maybe I’m actually Sir John in disguise.

  10. “And your (stereotypical lefty) response is “Up against the wall, the capitalist bastards“?”

    Sigh.

    No. GDP didn’t just drop because the contribution of the financial sector shrank. All contibutors to GDP shrank excluding the non-market (state) sector.

    Financial Meltdown led people to want to decrease their demand for currently produced goods and services and increase their demand for safe, liquid, assets and money. That is a recession. My proposition is that a large financial sector promotes macroeconomic instability and that this increases the cost of equity (because it is safer if a massive crisis and multiple defaults are round the corner) and that lots of output is lost in bad times too.

    Your (stereotypical righty) response to evidence showing a large financial sector leads to worse macroeconomic stability and therefore output lost is to misrepresent my view. You are not arguing with a stereotype.

    Also, another bone of contention, and I’m sorry I’m going to use shouty capitals, THESE PEOPLE AREN’T CAPITALISTS!

    Capitalists are quite useful, you know, they invent things and employ people. And while I do see it as exploitative, I’m not convinced that not being exploited is any better. Unemployed people are not being exploited, Somalis are not being exploited and it looks pretty rubbish.

    Capitalists own capital, financiers do not, they are intermediaries between people who want to save and people who want to invest. They also help people who have too much risk reduce it by finding people who like risk. etc.

    Not only that, but they are state subsidised intermediaries. Anywhere from £6 billion to £57 billion a year in subsidy to the biggest banks.

    Why do the right insist on defending finance?

    “What do you think that would do to growth forecasts?”

    I suggest a slight increase in long run economic growth and lower frequency of big decreases in GDP each year.

    Tim adds: “My proposition is that a large financial sector promotes macroeconomic instability and that this increases the cost of equity (because it is safer if a massive crisis and multiple defaults are round the corner)”

    Not sure you’ve thought that through. If share prices are higher because the safety of equity persuades more people to hold it then this makes capital *cheaper*, not more expensive. You have to give up less equity to get the same amount of money.

    This is, after all, the mechanism by which the incidence of stamp duty is passed along. More stamp duty on share purchases means fewer share purchases. This lowers the price of shares, raise the cost of capital and thus less capital is raised by companies. Less capital means lower labour productivity and thus lower wages, all other things being equal.

  11. “Not sure you’ve thought that through. If share prices are higher because the safety of equity persuades more people to hold it then this makes capital *cheaper*, not more expensive. You have to give up less equity to get the same amount of money.”

    Hah! I shouldn’t respond to comments while applying for internships. Yes I actually used the opposite word to the one I meant.

    But thanks for giving me the chance to quote what I was refering to:

    “It is possible to go one step further and argue that higher bank capital ratios could potentially
    lower banks’ cost of capital. The size of the premium demanded by holders of equity is a longstanding
    puzzle in finance – the equity premium puzzle.29 Robert Barro has suggested this puzzle
    can be explained by fears of extreme tail events.30 And what historically has been the single
    biggest cause of those tail events? Banking crises. Boosting banks’ capital would lessen the
    incidence of crises. If this lowered the equity premium, as Barro suggests, the cost of capital in
    the economy could actually fall.”

    http://www.bankofengland.co.uk/publications/news/2010/036.htm

    Tim, you’re an entrepreneur, to what extent do you consider financial crises when making investment decisions? Do you think about the levels of equity banks are required to hold in the country you are investing in?

    Tim adds: I went into Russia in 1991….so, no, I don’t think about banks capital reserves. But do note I’m a very small scale entrepreneur. The most outside capital we’ve ever taken was $150k or so. And we paid that back. We’ve no borrowings. We’re very much more like some 18 th cent bod trying to work out how to combine their own labour and capital than we are like a modern company.

    This is changing as rare earths and scandium become more interesting to the wider markets.

  12. Capitalists don’t “invent things and employ people.” They, as you correctly say in the next paragraph, “hold capital“.

    Now, to get this capital from the capitalists to the entrepreneurs, we generally use intermediaries because only the largest capitalists have the time and the knowledge to search out the entrepreneurs themselves. It doesn’t matter whether that’s Grameen, Kiva or, horrors, Barclays.

    Anywhere from £6 billion to £57 billion a year in subsidy to the biggest banks.

    NEF figures, yes? Not worth the electrons they’re printed with.

    Why do the right insist on defending finance?

    Our, admittedly unendearing, support for that false idol “efficiency”, the same reason we generally lambast the state sector.

    I presume Tim only got out of the LSE with his brain intact by the traditional method of attending lectures in the nearest pub, as opposed to the indoctrination cell.

  13. “NEF figures, yes? Not worth the electrons they’re printed with.”

    No, Oxera (2011) from the Royal Bank of Scotland, and Haldane (2010) of the Bank of England. Both quoted in the Interim Report form the Independent Commission on Banking.

    “Capitalists don’t “invent things and employ people.” They, as you correctly say in the next paragraph, “hold capital“.”

    “Our, admittedly unendearing, support for that false idol “efficiency”, the same reason we generally lambast the state sector.”

    Finance IS the state sector. Billions of subsidies, favours, incoherent regulation, the sate owns most of Lloyds. Lambast the state sector all you want, but be consistent.

    “I presume Tim only got out of the LSE with his brain intact by the traditional method of attending lectures in the nearest pub, as opposed to the indoctrination cell.”

    The LSE isn’t right wing enough for you?! The mind boggles, although it was set up by Fabians, it isn’t a hotbed of socialist thought.

  14. “Capitalists don’t “invent things and employ people.” They, as you correctly say in the next paragraph, “hold capital“.”

    Henry Ford etc.

    Finacing entrepreneurship is very hard, I’m not sure there’s a lot of evidence that the UK’s financial sector is much better at doing it than a much smaller sector would be.

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