There's a thing - Soros turns socialist

OVER THE last year George Soros, the international speculator, has become a modern day prophet of doom. With the self-flagellation of the zealot, moreover, he thinks it is people like him who pose the greatest threat to stability. Global capital markets are to blame for the meltdown in emerging markets, he now says; if they are not reigned in they'll end up destroying democracy.

Alarmist stuff, but is it worthy of attention? When I last came across Mr Soros, at a conference in Switzerland a little less than a year ago, he was still of the view that the crisis in the Far East was a largely localised affair. The countries it had engulfed only had themselves to blame for what had occurred.

They had ridiculously clung to pegged dollar exchange rates, when the economic fundamentals didn't support such a policy, and they had squandered the Western capital that had been pouring into the region on semi corrupt, cronyistic projects and speculations. In other words, there had been a huge misallocation of capital, which needed correcting.

With publication this week of his book, The Crisis of Global Capitalism, Mr Soros seems finally to have completed a 180-degree about turn. This is an important book, if only because Mr Soros seems to be saying "control me, and people like me, or we will do it again". He's also good on the causes of the crisis and the weaknesses it has exposed in what is often clumsily termed "the global financial architecture".

Particularly intriguing is the justification he uses for what he does. This basically comes down to the argument that if he didn't do it, someone else would, so that to the extent that his market speculations have adverse social consequences, they would happen anyway. If he worried about the social consequences, he would only handicap himself against those who don't.

Mr Soros is self-aware enough to know that as a moral justification, this is a bit of a cop out, and he uses the idea of this lack of accountability powerfully to illustrate the disinterested nature of markets as they rage around the world, sometimes acting as what he calls a "wrecking ball". Markets are not so much immoral, he writes, as amoral.

Unfortunately, this is where the book's value ends. Mr Soros's prescriptions for dealing with the turmoil look to be a combination of old hat, wrong thinking and fantasy. Essentially they distil down to two things - a global regulator for capital markets and the provision of guaranteed credit to countries that are applying appropriate free market policies but still become subject to speculative attack.

Mr Soros is not the only one to claim copyright on these ideas; both have already been embraced with varying degrees of enthusiasm by Western governments. Hans Tietmeyer, Bundesbank president, has been charged with drawing up proposals for coordinated global regulation while the International Monetary Fund is already well into sub-sub committee stage of attempting to establish pre-emptive mechanisms for dealing with financial crises. The little matter of who is going to provide the money for this new credit guarantee system has yet to be decided, but that surely is only a minor issue.

Nobody could sensibly take issue with the idea of greater co-ordination between national regulators, or indeed the establishment of best practice standards to which regulators would sign up. But Mr Soros goes further and this is where he begins to part company with reality. He thinks the United Nations might provide a model for the sort of world regulator that could properly protect against amoral capital markets.

A reformed and accountable UN, Mr Soros argues, could be used to promote and impose the standards and principles of open government and society. Indeed? Since when was the UN a formula for anything other than paralysis and argument? It is difficult enough to regulate financial markets on a national scale; just think of the bureaucracy and red tape that would become necessary to do it internationally.

But it is the idea of credit guarantees I find hardest to grasp. In my view, a large part of the mischief in global capital markets over the past two years has been caused by the very existence of the IMF, which stands ready and willing to bailout western creditors whenever things go wrong. This is anathema to the efficient operation of free markets, since the existence of such a compensation fund strips the risk out of investment.

If international capital knows it is going to be bailed out every time it makes a dud investment, it will never learn the lesson of these crises. If Western lenders and investors had been made to suffer the full consequences of their misjudgement, they'd be that much more cautious next time round.

Rather than helping the countries involved, the IMF aid has largely gone into repaying Western creditors. It is hard to see how the existence of pre-emptive loan guarantees helps. Much more likely is that they would compound the misallocation of capital which underlies the emerging markets crisis.

The problem, surely, is not that capital markets are inherently unstable, which is what Mr Soros suggests, but that they are prone to become so if their self correcting mechanisms are distorted by the knowledge that whatever they do, they cannot lose.

I find it slightly curious that an old fashioned liberal like me should be arguing this hard-line free-market case, while Mr Soros, a billionaire speculator, is meanwhile discovering the joys of brotherly love and being nice to the natives. All this no doubt makes Mr Soros feel better about himself, but I doubt very much that this retreat into neo-socialist thinking is the way forward either for the capital markets or the world.

The only qualification I would add to this general observation is that we in the West perhaps don't live as much by the free market standards we would foist on the developing world as we might like to pretend. When things begin to go wrong economically, we don't deflate, we reflate. Governments borrow more to spend more and central bankers stand ready to inject liquidity into the system, by cutting interest rates and printing more money.

When our banks go bust, we bail them out and depositors generally get their money back. This is as true of the US, land of the free, as it is here in Western Europe. We too have our examples of semi-corrupt, crony capitalism - the Savings & Loan and Long-Term Capital Management crises being only the most obvious.

The difference is, however, that we have adequate rules of transparency and accountability, backed by robust national regulation, so that the crises, when they do come, tend to be much more limited in nature.

The developing world is a good deal more likely to get the economic investment it needs via this route than the one suggested by Mr Soros, which seems to me to amount to little more than privately administered state aid.