George Soros Sends a Message

For those who believe Soros is an insider – certainly not in the innermost ring, but closer than the rest of us – the following comments from a review of his upcoming book, “The Tragedy of the European Union,” are telling:

George Soros, the billionaire investor, believes the banking sector is a “parasite” holding back the economic recovery and an “incestuous” relationship with regulators means little has been done to resolve the issues behind the 2008 crisis.

“The banking sector is acting as a parasite on the real economy,” Mr Soros said in his new book “The Tragedy of the European Union”.

“The profitability of the finance industry has been excessive. For a while 35pc of all corporate profits in the United Kingdom and the United States came from the financial sector. That’s absurd.”

“Very little has been done to correct the excess leverage in the European banking system. The equity in the banks relative to their balance sheets is wafer thin, and that makes them very vulnerable.

“A real danger to the financial system is the incestuous relationship between national authorities and bank managements. France in particular is famous for its inspecteurs de finance, who end up running its major banks. Germany has its Landesbanken and Spain its caixas, which have unhealthy connections with provincial politicians.”

Each of the above statements could qualify for top billing at LRC or as the main topic in a Mises Daily article.  Robert Wenzel could not have penned a more biting criticism of the current crony-banking environment.

But these statements aren’t the most telling; Soros has written such words before, writing like an Austrian economist in the past, for example:

I believe that the failure [of modern economic theory] is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge. That is what economic theory has tried to ignore.

Social events, by contrast, have thinking participants who have a will of their own.  They are not detached observers but engaged decision makers whose decisions greatly influence the course of events…. [A participant’s] lack of perfect knowledge or fallibility introduces an element of indeterminacy into the course of events that is absent when the events relate to the behavior of inanimate objects. The resulting uncertainty hinders the social sciences in producing laws similar to Newton’s physics.

To be sure, while he sounds promising in describing the situation, Soros doesn’t go full-boat Austrian / free-market for the solution.  For example, taken from the preface of the book (available as a preview from Amazon), he blames collateralized debt obligations and credit default swaps for the boom-bust cycle, without pointing to the root. He doesn’t question central banking; he doesn’t question government regulation.

The most telling statements from the aforementioned book review?

In his new book Mr Soros outlines, in a series of interviews with Dr. Gregor Peter Schmitz, how he believes the European Union is in danger of becoming a thing of the past unless its flawed structure is reformed.

The prospect of Germany leaving the eurozone is very real and it would have serious implications as the euro would depreciate sharply and deutsche mark would go through the roof, Germany would find out how painful it is to have an overvalued currency.

Holding the EU together is more important to the elite than is the survival of the banking sector within its current capital structure; within these few comments, we see Soros telling us this is so.  He is ready to chop the banks down to size.  The elite will take every action to preserve the current system – to include sovereign and financial sector bankruptcies.

In the preface of the book (taken from the preview at Amazon), it is indicated that Soros also blames “self-regulating financial markets” for the current calamity, further reinforcing the need to support regulatory democracy. 

Political consolidation and centralization is paramount, and control through regulatory democracy is the most effective control system ever devised by those who would control the masses (see here and here).

To summarize, Soros is suggesting two things:

First, the banks are too big, too unstable, and take too much wealth from society.  Yet, this is precisely how someone like Soros has made his billions of dollars.  Perhaps he is now writing this to ease his conscience; or perhaps he is writing this to establish the dialogue for the next steps.

Second, he writes that the Eurozone is in danger of coming apart.  He points to the actions of Germany, for example, as (inadvertently, he suggests) furthering the possibility of a break-up.  Soros suggests that Germany should either lead the way toward mutual debt and bank guarantees or leave the euro.  (Regular readers know where I have placed my bet.)  Much of the focus of the book, apparently, is about Germany and its current actions – and a Germany in the euro is preferred, but a Germany out of the system will be acceptable in order to salvage the rest.

Both subjects in one book.  Why?  What is the connection?

The subtitle of the book is “Disintegration or Revival?”  You can guess which side Soros is rooting for.  He writes openly of the ultimate objective that political decisions are no longer made in London, Paris, or Berlin, but at the European level.  He sees Germany as hindering this consolidation.

I have offered my interpretation of the connection of these statements by Soros.  I am open to others.

One thing is for sure: this connection is not random, and Soros isn’t a puny little mosquito saying it.