The financial crisis has shown that markets are bubble-prone and that laissez-faire regulation doesn't work. The authorities need to get a grip if we are to avoid a mega-bubble. But we may need an even deeper crisis for that to happenby Mark Hannam / July 26, 2008 / Leave a comment
JONATHAN FORD (CHAIR): I want to start by asking where we are in the crisis. Is it over? George Soros, you have said that this is the worst crisis we have been through for 60 years. Presumably you still believe that there is worse to come?
GEORGE SOROS: There is now a widespread belief that the crisis is over. I think, on the contrary, that the effect on the real economy is yet to be felt. The measures taken by the authorities will not bring recovery. There are four reasons for this. First, the fall in house prices in the US is only halfway over and in Britain it has hardly begun. Second, consumers have been slow to adjust their spending habits, but this is about to happen. Third, the financial system is severely wounded, and even though banks have been remarkably successful at raising more equity, they will cut back on lending and this will feed through to capital spending and business activity. Finally, and most important, there is a threat of inflation at the same time as a slowdown. The rise in energy and food prices will turn the slowdown into a recession.
ANATOLE KALETSKY: I agree with George that the threat of inflation is potentially the most alarming new factor in this crisis, but I would challenge the other three points. The worst is over in the real economy in the US, although not yet in Britain and Europe. US house prices do not have much further to fall, and consumer spending will hold up. While there are, indeed, several trillion dollars of consumer spending to come out of the system, the impact may be quite comfortably spread over many years. And while the financial system has been wounded, the bank writedowns—in the US at least—have already gone beyond what is plausible in terms of likely losses. There is one shoe that has yet to drop: the continental European banks, which have not recognised the losses to the same extent.
JOHN GIEVE: We are coming through the first acute liquidity shock to the banking system, and although there are still lots of risks, we expect confidence gradually to return. But the end of that phase does not mean the end of the downturn. In Britain, where things have…