STAFF NEWS & ANALYSIS
George Soros – Secret Austrian Economist?
By Staff News & Analysis - March 09, 2010

Billionaire investor and Soros Fund manager George Soros (left) says President Obama mishandled the financial crisis big time. Soros would have preferred that the government take over U.S. banks instead of bailing them out, a move he believes would have been more popular with Americans, The Wall Street Journal reports. "The solution that he found to the financial crisis, which was to effectively bail out the banks and allow them to earn their way out of the hole, was, in my opinion, not the right solution," Soros said in an interview with CNN. "He should have compulsorily replaced the capital that was lost." Soros says China did a better job of managing its banks by forcing them to increase their minimum capital requirements. Soros also noted that the "market fundamentalist" belief prevalent in the U.S. during the Fed tenure of Alan Greenspan is wrong, citing his own investment decisions as evidence. "When I see a bubble, I buy that bubble, because that's how I make money," Soros says. – MoneyNews

Dominant Social Theme: Stop fooling around! Take real action – nationalize something.

Free-Market Analysis: We found the article, excerpted above, fascinating. We did not find it so because Soros advocates US bank nationalization (of a sort), however, but because in it Soros reveals – inadvertently or not – what we have always known (but could not always convince others of), that he is at heart a free-market, Austrian-based economist. At least he is from an investment/strategy standpoint.

Some background first. We have known this all along because when he was a student, Soros studied in London under some of the greatest laissez faire professors of all time. And we knew from his incomprehensible books which seem to present Austrian economic theory in his own language, with so much elaboration and confusion that only a few could ever tell the initial inspiration. Finally, we have known this about Soros because he so evidently and obviously utilizes Austrian economic analysis in order to pursue his investment strategies.

Here, finally, Soros all but comes out and admits it. "When I see a bubble, I buy that bubble, because that's how I make money," Soros blurts out. One takes Soros literally at one's peril. He may "sell" the bubble as well – short it. But the point of this is that Soros recognizes bubbles and expects to take advantage of them and he is one of the best at doing so, or so his track record would seem to illustrate. He is also, from our point of view, somewhat cynical about it in that his public rhetoric is all about the value of government interference in the markets while his private investment actions are definitively market oriented.

Bubbles are the province of free-market economics. The great socialist economist John Maynard Keynes was not especially fond of bubbles because they would have drawn him into a larger discussion about competition, the validity of the Invisible Hand, etc. Keynes was more interested, of course, in establishing the validity and credibility of government interventions into a flawed private market that constantly needed the correctives of the bureaucracy. He did deal with inflation, because he had to – claiming that "inflation" was the result of "wage push." And he seems to have believed that a depression was merely a lack of consumer demand. But when it came to the larger issues of the business cycle, Keynes had far less to contribute than free-market economists.

It was up to Austrians such as FA Hayek and Ludwig von Mises himself to analyze the business cycle and how central banking and fiat money printing aggravated it and caused booms and busts. This they did brilliantly during their lifetimes. Thus, Soros' admission that he makes his money by "seeing and buying" bubbles builds on Austrian economic analysis. It is Austrians who defined what bubbles are and how they work.

But there is more to Soros' remarkable interview, which was conducted by CNN and further reported in the Wall Street Journal. Here is an excerpt directly from the WSJ article:

Mr. Soros said the U.S. and China needed to work closely to manage the global economy, calling recent signs of bilateral tension worrying. The two countries disagreed over how to tackle global warming during a meeting in Copenhagen recently, and have faced off over trade and currency issues. Mr. Obama met with Tibet's exiled spiritual leader the Dalai Lama of Tibet in the White House this month, despite official protests from China. "Unless we stop it in the next few months, I think that we could yet fall back into a situation that prevailed in the 1930s, where each country is for itself," Mr. Soros said. He said trade protectionism was his top concern, in terms of the global economy's outlook.

Turning to Europe, Mr. Soros said worries about Greece's debt had exposed a flaw in the euro's construction, namely that the 16 euro zone countries, which share a single currency, had a common central bank but not a common Treasury. "Either Europe now takes the institutional measures that are needed to make up for the deficiency or, in fact, it may not survive," said Mr. Soros. Soros Fund Management is one of several heavyweight hedge funds that are betting that the Greek-debt woes will push the euro lower.

One can see in these comments (at last we can) that Soros is addressing power elite dominant social themes and putting them in perspective. For Soros, issues of global warming, global trade, the viability of the European Union are all top-of-mind. He is even betting, according to the article that "Greek-debt woes will push the euro lower." One looks in vain for Soros to discuss the prospects of IBM or the success or failure of GM within a product context. Of course this is not the kind of investing that Soros does, but that's just the point. He plays the game at the highest and largest level and apparently now manages some US$27 billion.

He has accomplished all this with a free-market world view. There is little doubt! His rhetoric is socialist but his analysis is first of all Austrian and then somewhat along the lines that we here at the Daily Bell advocate. In fact, we are proud to claim him as one of our own – not as a political pundit or economic philosopher (Lord help us) but as the amazingly successful investor he is … so far anyway.

Soros, in our opinion, utilizes techniques we regularly suggest. Yes … Soros analyzes dominant social themes, determines the likelihood of their success or failure, and then overlays them on top of the business cycle itself to determine where they fit and whether the timing is right. (He also cynically manipulates public opinion, squeezes governments if he can, etc., but that is an article for another day.)

The only thing we advocate that Soros does not do – or has not spoken publicly about – is the necessity of taking the Internet into account in virtually every decision one makes. And that's because we think the 'Net has drastically complicated the task of savvy investors like Soros. Instead of just worrying about dominant social themes these global investors now have to analyze the Internet's impact on them.

After Thoughts

We have no idea why Soros is advocating the nationalization of American banks, or why he is talking up the Chinese approach as superior. We don't really care. Most of what Soros says these days has little or nothing to do with the way he actually invests, we would suggest. Occasionally, however, he says something fairly frank and revealing in between all the socialist rhetoric – and his line about investing in bubbles may be just such revelation. Put that statement (and others like it) together with publicly available documents about his investment strategies, the strange but discernibly market-based sentiments of some of his books and his free-market oriented economic education long ago, and you have the makings of one of the most successful Austrian-style investors of all time. Ironic, huh?

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