Can Europe Save the World?

Attended a debate by the legendary George Soros and Guy Verhofstabt, the former Prime Minister of Belgium. (I like how Soros, a currency trader, needs no introduction, but the former PM of Belgium does)

The topic of the day was “The Financial Crisis: How Europe Can Save the World” – based off Verhofstabt’s new book. I don’t pretend to know much about Europe (actually, I don’t think I know anything about this continent I’ve spent the last 3 months in), but I was there to see the world’s greatest currency trader in person, and I didn’t really care what the topic was.

(Actually, that’s a lie. I attended a video conference talk by Soros a few weeks ago about his theory of “reflexivity”, which was immensely esoteric and hard to follow. So maybe I was hoping that this would be a little more interesting than the last.)

I wasn’t disappointed. While they didn’t say anything new, there were some interesting perspectives from both sides. From what I understood, Verhofstabt was advocating very strongly for a singular European strategy on how to deal with the effects of the crisis. He bemoaned the fact that right now, there are “27 different recovery plans among the European nations”. Furthermore, these 27 plans seemed to be ineffective: according to the IMF, Western Europe would be the only region in the world to remain in stagnation in a few years.

In contrast, Soros called for the implementation of even more regulation on a global scale. He noted that the market fundamentalist approach was evidently unsuccessful: capital flows freely in the current system and cannot be taxed or regulated effectively – it flows to where it is treated best. He looked to the Financial Standards Board (FSB) as a possible solution, perhaps to establish a set of standardized rules which would be accepted and implemented across all nations. This would, according to Soros, prevent “regulatory arbitrage”. Autonomy in terms of enforcing these rules could be left to the individual states.
One interesting point he brought up was that these new rules should apply not only to banks but also to pension funds and insurance funds, since they were all competing for the same capital. This could be one measure of mitigating the contagion effect of a crisis. (I wonder he felt if these rules should apply to hedge funds as well? :D)

Soros also stated his strong opinions on Credit Default Swaps (CDS). He strongly feels that they should be banned altogether. According to him, a CDS is the equivalent of “selling insurance to people on someone’s life, and then giving them a gun” I thought this was hilarious.

This was honestly one of the most interesting lectures I’ve had at LSE. If only my lectures could be about macroeconomic and regulatory trends, financial crises and their impact, instead of how to price a freakin exotic option.

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