Soros: Bilateralism is ‘dangerous’

06/10/2009 | Anthony Rowley

Soros warns of market fragmentation

Veteran financier George Soros yesterday voiced concern that the globalized system of finance that evolved in the run-up to the global crisis is beginning to give way to a more fragmented system of “bilateral rather than multilateral financing”.

He cited the growth of “state capitalism” in China as an example, and said that the trend toward reserves-rich nations becoming major providers of funds to partner countries – instead of global capital markets serving this function – is “dangerous.”

It could “cause conflict between states”, Soros claimed at a seminar in Istanbul. Already, in the wake of the financial crisis “alternative systems are beginning to manifest themselves,” he said.

Reregulation is needed in the aftermath of major deregulation of the global financial system, but it needs to be done in a coordinated way across national jurisdictions, he stressed.

Otherwise, there will be regulatory arbitrage and “capital will go to where it is best treated”, he said. If financial reregulation is not done now, the impetus for reform will quickly fade.

The crisis is already beginning to “seem like a bad dream and people are waking up and hoping that it will just go away,” Soros said. “Your need reregulation but it is not going to be easy.”

Former World Bank chief economist Joseph Stiglitz charged yesterday at a separate briefing that the global financial system has become “bloated” and needs to be “downsized and restructured”.

Stiglitz, now professor of economics at Columbia University, called for a kind of “pollution tax” to be imposed on financial institutions, because of the way in which they poisoned the system with toxic assets.

It is also only fair that banks and other institutions pay a tax to compensate for the “massive subsidies” that some of them have received by way of state-funded final bailouts, he argued.

Stiglitz pointed out that financial sector profits comprised more than 40% of total corporate profits in the US before the onset of the crisis. Finance had become “an end in itself rather than a means to an end”.

The financial sector needs to be reregulated following sweeping deregulation in recent years, but it also needs to be downsized and restructured, he said. “There is also a consensus that you ought to tax the financial sector.”

He cited as justification for a special financial sector tax the fact that the US Congress “voted $700 billion of aid” to the financial sector at the outset of the crisis. “This is equal to ten years of [US] foreign aid,” he added.

The Istanbul meetings have provoked extensive debate on how extensive and severe re-regulation of banks and other financial institutions should be in the wake of the financial crisis. Strong arguments in favour of regulation have been countered by claims that over-regulation could stifle global economic recovery.

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