Questioning Soros: Size versus quality in the current economic crisis…

January 29, 2009

George Soros to the BBC from Davos on why he compares the situation today to the Great Depression: “The problem can be demonstrated today to be significantly larger than it was in the 1930’s with a simple calculation. I’ll use the United States. The credit as a percentage of GDP was 160% in 1929, and rose to 260% in ’32, beginning of ’33, because of the deterioration. In ’08 we started at 350%, therefore it is bound to go over 500 [%] which is double what it was in the ‘30s. And that doesn’t take into account the pervasive use of derivatives, all kinds of derivatives which are pervasive and complicated the situation enormously. So the problem is bigger.”

Soros continues to say that the experience of the 30s tells us how to deal with collapsing credit. National governments must “print money to make up for the credit, recapitalize the banks and write off debts in an orderly way”.

Is the current economic crisis just a matter of size, or is there something qualitativly new that has been generated by financial innovation – the ‘complications’ mentioned above – that will make 1930s solutions inadequate to the task at hand? Given the failure of recapitalization in which the banks have used federal monies for deleveraging rather than credit creation, I seriously wonder.

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