…then how can we trust them to better manage the economy?
A few weeks ago famed currency speculator George Soros made news complaining that financial regulators had been “consistently behind the curve” during the unfolding financial crisis. But why is Soros surprised?
It seems that “behind the curve” is one of Soros’ favorite phrases, and he applies it frequently to central bankers. Among those Soros has charged with being “behind the curve” are the Bank of England (April 2008), the U.S. Federal Reserve (January 2008), central banks in general (in his new book, The New Paradigm for Financial Markets, Public Affairs 2008, p. 100), and then-Fed Chairman Alan Greenspan (March 2001). Then there was the famous 1992 incident in which Soros made a billion dollars betting against the Bank England, which was evidently then “behind the curve” in a currency crisis.
As a currency trader, Soros made his billions specifically because central bankers in various nations are periodically, predictably behind the curve of international trade and funds flows. If they weren’t, the currency spikes and plunges that Soros profits from would be far rarer and less abrupt. Arbitrageurs and speculators from the Medici’s or earlier have profited from the mistakes of kings, parliaments, bureaucrats and central banks.
Soros has been smarter, luckier, or craftier than most, but even he does not see the future perfectly: according to one report he bought over 2.4 million shares of Lehman Brothers just a month before the firm went bankrupt.
The important part of Soros’ complaint isn’t the “behind the curve” slam, it is the “consistently” part. As we think about reforming financial systems in the wake of the current financial crisis, it is not realistic to expect central banks (or other regulators) who have been consistently behind the curve for decades to suddenly get ahead of the game simply by giving them more authority. It is more likely that increasing regulators’ power will simply magnify the consequences the next time they (predictably) fall “behind the curve.”