Billionaire George Soros doesn't mince words.
"It's time to recognize that markets do need to be regulated, and that regulators have failed to fulfill their obligations over the past 25 years," he told National Public Radio.
Soros doesn't want to return to what he describes as the pre-1970s sovereign government regulation of finance — he wants authorities to regulate credit as well as the money supply.
"I think it ought to be part of (regulators) duties to prevent asset bubbles from growing too big. For that, they would have to acknowledge that markets tend to produce bubbles," Soros says.
"We've had a series of small financial crises since 1980," Soros observes.
"Each time, when the real economy was threatened, the Fed stepped in, lowered interest rates, provided monetary fiscal stimulus, so we got out of it."
That, Soros says, reinforced both the credit expansion and the misconception that markets are self-correcting.
Soros would like to see a more subtle brand of regulation, one in which the central bank would act more as an avuncular adviser than political police officer who uses tactics like writing a letter to banks suggesting they refrain from adding more mortgage loans to their portfolios for the time being.
"For more than the past 25 years, we've been in a period of credit expansion and wealth creation. Now, we're in a period of credit contraction and wealth destruction," Soros says.
Investment banks and hedge funds based their calculations of risks on the idea that deviations are random. "We should have learned better years ago," Soros says.
Soros points out that there are now more than $62 trillion in devalued financial products — an amount equal to more than half the entire household wealth of the U.S. and several times the size of the national debt.
"Those instruments were designed on the false conception that markets trend toward equilibrium, and deviations are random," Soros says.
That process became self-reinforcing. "When you have self-reinforcing processes, (deviations) are not random."
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