Soros: A new economic system is required

BUDAPEST, Oct. 27 (Xinhua) -- Hungarian-born investor and philanthropist George Soros said in Budapest, Hungary, on Tuesday that the entire edifice of global financial markets that has been erected on the false premise that markets can be left to their own devices has to be rebuilt from the ground up and that a new economic paradigm is required.

Soros who came out of retirement in 2007 to help manage his hedge fund firm Soros Fund Management through the recent crisis, also announced that he will set up and sponsor an Institute for New Economic Thinking (INET) intended to foster research, workshops and curricula that will aim to develop an alternative to the prevailing economic system.

Soros said he will commit 50 million dollars over ten years and hopes that other donors will join. INET will be launched in Cambridge University, England, in April 2010. The Central European University in Budapest, which is hosting a series of lectures this week by Soros, will also be a hub of the INET network.

Blaming both regulators and participants in the financial markets, Soros said, "The recent crisis is comparable to a hundred-year storm. We had a number of crises leading up to this one, comparable to five-or ten-year storms. Regulators who had successfully dealt with the smaller storms were less successful when they applied the same methods to the hundred-year storm."

Soros outlined his theories of capitalism and its tendency to produce bubbles and described the crisis as he saw it. "Behind the 'ordinary' sub-prime housing bubble in 2007 was a much larger super-bubble growing over a longer period of time. The sub-prime collapse set off the explosion of the 'super-bubble', much as an ordinary bomb sets off a nuclear explosion. The misconception which inflated this super-bubble was the false belief that financial markets are self-correcting and should be left to their own devices which in turn led to the ever-increasing use of credit and leverage."

Soros believes fundamental regulatory reform is required. "The financial authorities have to accept responsibility for preventing bubbles from growing too fast."

Soros argues it is not enough to control the money supply, the availability of credit must also be monitored.

Not just monetary controls but credit controls must be applied such as margin requirements and minimum capital requirements which need to be varied in order to control asset bubbles.