Jeffrey A. Frankel is the New Century Chair at the Brookings Institution. Until March 1999 he was a Member of the President's Council of Economic Advisers, and he will become a Professor at Harvard University in July.
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
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