George Soros on the credit crunch
Posted on May 21, 2008 by Richard Beddard
Filed Under Markets |
You’ve had a period of credit expansion and a belief you can leave markets to their own devices, what I call market fundamentalism, and because markets do go to extremes we have had a number of financial crises… but each time the authorities intervened and bailed out the failing institutions and stimulated the economy and we got off pretty well without any disruption. So we came to believe that markets can be left to their own devices and that is not the case.
There is a much greater degree of uncertainty in financial affairs than we recognise and the degree of uncertainty is also uncertain. Quite often, for the last 60 years, we have had a pretty stable situation and I think we are entering a period of much greater instability because we’ve got the threat of recession and at the same time the threat of inflation.
We’ve had a pretty serious crunch but the acute phase is behind us and we have yet to feel the effects. In the case of the United Kingdom you have had a housing bubble that in terms of price increases is greater than in the United States and that is also now going to be corrected. It’s taking longer than in the States because you haven’t had over-building the way you had in America but actually households are more indebted, the cost of houses in relation to earnings is greater than anywhere else in the world and now banks are no longer willing to lend as freely as before.
At the sharp end, British Land says the value of its commercial property portfolio has fallen 10%. Asked if he expects values to continue to decline, chief executive Stephen Hester agreed with Mr Soros, that we’re at the point where the real economy adjusts:
I think we have a shift of emphasis, which in effect echoes some of things George Soros was just talking to you about from the adjustment of financial markets on to the adjustment of the real economy and the extent to which an economic slowdown impacts our customers [e.g. shops] and therefore the rents that they pay.
Construction costs have been one of the steepest inflation items in our industry and that in turn means it’s becoming less affordable to build new buildings whether those be residential housing or whether those be office blocks and shops. And that process, of course, in effect helps to correct the market downcycle because if the supply of new buildings slows down, dries up even, then in due course the next up-turn comes as people eventually demand more space.
Comments
Leave a Reply
