|Rogue On George Soros|
[EDITOR'S NOTE: Today, Rogue Media and Technology looks at international financier George Soros, currency trader, investor, and philanthropist. How is Soros' idea of the open society useful in understanding the value of the Internet? How has his assertion that markets are always wrong helped him make money? How do his financial pursuits conflict with or complement his broader political goals? Is he a model worthy of emulation?]
In the winter of 1993-1994, during the darkest days of the Serbian seige of Sarajevo, American intellectual Susan Sontag made several extended visits to the city that had become the West's great embarrassment. Her mission: to help a local theater company stage Samuel Beckett's modern masterpiece WAITING FOR GODOT.
At very nearly the same time, international financier George Soros was involved in a rather different Bosnian mission. Soros had put up the money to reconstruct Sarajevo's water and gas lines. This project provided a lifeline for residents who could now avoid the daily visits to the exposed water distribution sites, where they became targets for snipers.
It's tempting to contrast these two quite distinct projects. Which, really, was more significant? Of what value is a play when you're faced with bitter cold and little food? On the other hand, what good is water and heat if the will to survive has been crushed?
As a woman who had written two brilliant works on how the mind could and should be deployed as a forceful weapon in overcoming disease, Sontag seemed perfectly suited for her task. Who better to help a devastated people find sustenance in a play that's preoccupied with how to live in the face of complete, even absurd, uncertainty? By contrast, one could see Soros as a generous man willing to look after material needs, but somewhat oblivious to the importance of the spirit. After all, here is a man who has devoted most of his life to making money through rank financial speculation, something he has excelled at like no other.
But as last year's SOROS ON SOROS (John Wiley & Sons, 1995) makes clear, nothing could be further from the truth. In this surprising, often astonishingly insightful book, Soros reveals himself to be a complex man with deep philosophical commitments that make him passionately, even desperately supportive of exactly the kind of project Sontag herself was engaged in. One might even say that Soros' capacious understanding of markets and international relations have made him keenly aware of the contradictions of capitalism and of the intellectual and moral vapidity for which democratic societies too easily settle. Many of his roguishly unconventional views follow from his moral commitment to actively correcting the faults of the systems that have made him rich.
As many know, Soros was launched into international celebrity on September 22, 1992 when he officially became The Man Who Broke the Bank of England. At the time, West Germany was busy swallowing up the former East Germany, creating a pocket of growth and inflation amidst a European community otherwise marked by high unemployment.
As the Bundesbank moved to raise rates, it threatened the Maastricht Treaty by putting pressure on the European Exchange Rate Mechanism (ERM) that was to be the vehicle for creating a unified European currency. Even though other European countries needed lower rates to spur growth, they were forced to raise them, or see their currencies decline relative to the powerful German mark.
Soros' Quantum Fund, then and now managed by Stanley Druckenmiller, stepped into this crisis environment to bet against the Italian lire and then the British pound. Indeed, the British position seemed so untenable, Soros "coached" Druckenmiller to leverage an enormous bet of $10 billion. Even as the British government announced a 2% rate hike, Soros kept selling sterling.
By evening of that day, the British were forced to rescind the rate increase and withdraw the pound from the ERM altogether. Sterling immediately plunged relative to the mark, and Soros' hedge fund walked away with more than $1 billion in profits. As the financial writer Adam Smith would later say, "It was the coup of a generation."
Soros is not ashamed of making so much money. Indeed, he is among the best ever at what he does and clearly enjoys his acumen. An article in THE WALL STREET JOURNAL last summer reported that Warren Buffett's investments returned, on average, 27% annually since 1957. During his years at Fidelity Magellan, Peter Lynch showed 29% returns. From 1969 to 1995, Soros' Quantum Fund returned 34% annually. These numbers included a 6% loss for the first half of 1995 and a unsatisfactory gain of just 3.9% in 1994, a year when Quantum made one significant bet against the yen that cost the fund $600 million.
Soros' own money is included in the $11 billion his funds manage, and, unlike other hedge funds, both he and his associates take a cut based on the funds' absolute, rather than relative, performance. As a result, Soros' net worth is reportedly over $1 billion.
But Soros seems uninterested in his riches aside from the good uses he can put them to. And he's openly critical of the very kinds of trades that have made him wealthy.
"I fight for many causes in my life," he has said, "but I don't particularly feel like defending currency speculation. I consider it a necessary evil. I think it is better than currency restrictions, but a unified [European] currency would be even better . . . I think that it behooves the authorities to design a system that does not reward speculators. When speculators profit, the authorities have failed in some way or another."
Indeed, Soros seems to have been so successful finding and betting on systemic conditions of disequilibrium because he is almost painfully cognizant of the flaws or internal contradictions of systems. He has the ability to profit from disorder because he so passionately believes in the necessity of systems and wants them so badly to work, even though he knows they will eventually falter.
Rather than being a security analyst, Soros talks of being an *insecurity* analyst. "I recognize that I may be wrong. This makes me insecure. My sense of insecurity keeps me alert, always ready to correct my errors."
The Quantum Fund uses a "macro" investing technique that depends on adopting an overall posture toward an economic trend and then deploying the best assortment of instruments---individual stocks, bonds, currency positions, indexes, or derivatives---to profit from the trend. But in developing a certain hypothesis concerning a trend, Soros also looks for the flaw in the hypothesis. Knowing the flaw allows him to follow the herd while being constantly alert to factors that create "inflection points" where the trend changes.
"The prevailing wisdom is that markets are always right," he says. "I take the opposite position. I assume that markets are always wrong."
Soros seems pre-eminently interested in such discontinuities and in the imperfect human understanding that ensures their occurrence. In fact, he has developed both an entire philosophical system that accounts for this instability and a moral corollary that requires a certain vigilant activism to rectify the social fissures. What's surprising is that Soros' views seem genuinely rooted in the main epistemological currents of 20th-century philosophy even as he applies them to the tangible currents of financial markets and to the broader terrain of civic society.
His first calling, in fact, was philosophy. As a upper-middle-class Hungarian Jew, Soros lived through the tumultuous period of Nazi persecution and Soviet occupation. On escaping to England at age 17, he studied at the London School of Economics under Karl Popper, the champion both of the scientific method and what he called "the open society." Soros even wrote a lengthy thesis called "The Burden of Consciousness, " to which he would return years later, when he was already a successful money manager.
The revealing essence of Soros' views is that we live in a relativistic world where, outside of hard science, there is no recourse to "truth," only beliefs. Echoing a long line of pragmatist philosophers, Soros holds that beliefs are as good as truth both because we have nothing else and because beliefs always shape the world in a way that can make them true, at least for a time.
This philosophical stance leads Soros to a number of intellectual positions. First, classical economics assumes that market participants act on perfect knowledge and that, therefore, the system is rational. Soros believes the opposite.
Participants' perceptions influence the markets that they purport merely to analyze. "They cannot obtain perfect knowledge of the markets because their thinking is always affecting the market and the market is affecting their thinking." Soros uses this general theory of "reflexivity" to explain the boom/bust cycle so often found in financial markets. Trends are at first self-reinforcing but then self-defeating. What this means is that "economic theory needs to be fundamentally reconsidered," he says.
In turn, this means that financial markets are inherently unstable and are just as likely to lead to unsustainable excesses as to equilibrium. Indeed, Soros goes further. "I don't believe competition leads to the best allocation of resources. I don't consider the survival of the fittest the most desirable outcome. I believe we must strive for certain fundamental values, such as social justice, which cannot be attained by unrestrained competition."
A system of perfect competition can easily endanger the market itself, as political instability and economic instability feed off each other. As one who has benefited from the system, Soros believes he has an obligation to make it better, both by cautioning against complacency and by encouraging a proliferation of mini-models of the society that he values.
In the abstract, Soros approaches the subject by contrasting closed societies, such as the former Soviet Union, with open societies like those of Western democracies. In their essence, open societies do not follow any blueprint; they are places where conflicting ideas flourish and local participants create their own institutions to suit their needs. Soros is actively involved in promoting such open societies.
In 1979, when his personal wealth was a mere $25 million, Soros began helping to finance local groups interested in fostering open societies in the nations of Eastern Europe. He began with early donations of about $3 million a year to dissidents in the area, including Poland's Solidarity movement, Czechoslovakia's Charter 77, and Russia's Andrei Sakharov.
Rather than direct their actions, he aimed only to support those who had staked their lives to the cause of reform. He gave them the autonomy to find ways to act constructively even while he remained attuned to the risk that his money might be corrupting. Some of his money went to such simple things at copier machines (in Hungary), which were used to publish underground papers.
These early forays into philanthropy spawned Soros Foundations in 25 countries. He now gives about $300 million *annually* to support them. Most of these efforts are, like Sontag's mission in Bosnia, designed to foster hope through improving liberal humanist dialogue in given countries. For example, in 1991 Soros founded Central European University in Budapest; he currently offers the school's main support, a $50 million a year donation. The school offers high quality graduate education to 450 students from across Eastern Europe.
Soros has also made numerous efforts in the former Soviet Union. At one point he gave $500 emergency grants (more than a year's salary) to 30,000 Soviet scientists, since they were receiving little other support from their government. He's also donated hundreds of millions of dollars to purchase scientific journals, economic textbooks, and a communications network that he hopes will link to the Internet all the schools, universities, libraries, newspapers, and hospitals throughout the former Soviet Union.
With such efforts, it's little surprise that Soros admits to having "messianic fantasies" of wanting to change the world. But he insists that people act now. Troubled by the tendency of institutions, even philanthopic ones, to become rigidly ruled by the desire for self-preservation, Soros wants his foundations to spend his money, even his capital, now, so that their disappearance will be assured at his death. He has also hoped that his efforts would encourage both Western governments and private investors to do more to support the new nations created in the wake of the end to the Cold War.
But Soros has been bitterly disappointed in this area. He chastises the West for failing to act more decisively in nurturing these societies. In his view, the revolutions of 1989 created new movements toward openness without much of the required capital or understanding to create systems that could truly replace authoritarian rule with something resembling genuine democracy. He even goes further, suggesting that the collapse of the Soviet Union has meant the West has "lost its bearings."
According to Soros, a new concept of freedom has developed in the West, one that reveals the West's previous commitment to an open society to be merely a tool of propaganda to embarrass the Soviet Union. The new concept is narrower, turning on a notion of "geopolitical realism" in foreign policy and a faith in laissez-faire economics.
Both views encourage nations to pursue narrow self-interests to survive and prosper. In Soros' view, though, these doctrines are inadequate and misleading. "They emphasize the importance of competing within the system, but pay no attention to the preservation of the system itself."
He fears, in fact, that we've entered a period of global disintegration of which we are not yet aware. For Soros, the threat follows from the fact that open societies suffer from a deficiency of values because there is ultimately no appeal to truth that transcends mere belief. The very lack of traditional guideposts that characterizes open societies is inherently their greatest challenge, because open societies too easily lose a sense of moral purpose. With the collapse of communism, the West was left without the reflexive relationship that charged its int