Soros' Split Personality: Scanty Proposals from the Financial Wizard

George Soros' new book has breathtaking intellectual ambition, with a scattering of good insights about international economics and politics. But Soros' proven success as an international investor is more likely to attract readers than his stab at economic theory, as he himself notes. I confess to being most interested in the interrelationship of Soros' three roles -- investor, philanthropist, and public intellectual. When Soros the speculator helps force a currency into crisis, what does Soros the philanthropist think about the social or moral implications for the country under attack? The reader might anticipate one of five possible answers.

Stop me before I speculate again. This is what one most expects. As an intellectual, Soros clearly thinks that market values have overshadowed social values, that financial markets have become excessively volatile, and that some government intervention is appropriate. But his book contains no actual proposals, such as James Tobin's turnover taxes on foreign exchange, for calming excitable financial markets.

As an individual speculator, I am too small to have an effect. There is no logical contradiction between supporting tightened financial market regulations and simultaneously exploiting existing ones. This is particularly true for individual speculators whose small investments cannot affect market prices. Soros used to be in this category, but in a footnote he acknowledges that he no longer is. Now he moves markets.

My investments generally push markets in desirable directions; it is the activities of others that are potentially harmful. Soros could plausibly defend this claim. Hedge funds in general and Soros in particular make bets based on economic fundamentals, for example, against overvalued markets; in contrast, most bank foreign exchange traders simply follow the herd. The Quantum Fund's 1992 short sales of sterling arguably helped move Britain's exchange rate toward its proper equilibrium, and its 1997 baht selling should have alerted Thai authorities to a similar problem. This is how investors should operate -- making markets more efficient -- yet too often fail to. But Soros never explicitly says that financial markets would be fine if other investors behaved as intelligently as he.1

I devote a large share of my profits to charity, thus morally compensating for my speculation's negative effects. Soros could sustain this claim as well. His "open society" philanthropy in eastern Europe and elsewhere is extraordinarily generous, innovative, and efficient. But he does not attempt this sort of self-justification, perhaps to his credit.

My speculative self is completely divorced from my philanthropic self. This seems to be Soros' preferred answer. His two distinct personalities need not be consistent: "I try to be a winner as a market participant and to serve the common interest as a citizen and a human being. Sometimes it is difficult to keep the two roles separate." Elsewhere he claims to have synthesized them, which is what one would expect, considering that his analytical self writes about the interconnection of markets and social values: "I have made a conscious effort to integrate the various aspects of my existence, and I am happy to report that I have been successful." But how these personalities view each other remains a puzzle.

RUSSIAN REAL TIME

The reader can find a fascinating illustration of this puzzle in the chapter "A Real-Time Experiment." On August 9, 1998, Soros interrupts his manuscript, turns to the reader, and in effect confides, "I see things are heating up in Russia. Let me show you how it is done." He then chronicles in real time two weeks of the Russian crisis, including his conversations with Anatoli Chubais, Yegor Gaidar, David Lipton, and Robert Rubin.

Frustrated that his plan to save Russia is not eliciting sufficient reaction from top policymakers, Soros publishes in the Financial Times a letter that includes the recommendation "the best solution would be to introduce a currency board after a modest devaluation of 15 to 25 percent." Speculators read over their morning coffee that the financial wizard considers the ruble overvalued, and some infer that Soros must have a large short position in rubles. In other words, they may have assumed that Soros the speculator was speaking when it was really Soros the public intellectual. In any event, they flee from the Russian currency. On August 26, with the ruble devalued, Russian debts in default, and Prime Minister Sergei Kiriyenko fired, Soros admits that his real-time experiment is a failure. To his horror, he has precipitated the very crisis he set out to prevent.

Incidentally, the market manipulation some suspected Soros of is perfectly legal in international currency markets, although illegal in domestic securities. As it happens, Soros was long in ruble assets, not short, as he takes pains to stress. His funds reputedly lost $2 billion on Russia in August. Clearly, Soros' split personality is partly explained by his now limited involvement in the Quantum Fund's day-to-day decisions. One only wishes he had recorded in the book the conversation with his fund manager following the Russian default.

THE SOROS CRITIQUE

Economists will be infuriated by Soros' characterization of their financial market models. His dismissal of rational-expectations and efficient-markets theories is disarmingly straightforward: "I have to confess that I am not familiar with the prevailing theories about efficient and rational expectations. I consider them irrelevant and I never bothered to study them." One sympathizes. But since he purports to instruct his readers in what economic theory says, this attitude sits poorly.