STEVE INSKEEP, host:
When the credit crisis hit last year, the billionaire George Soros took himself out of semi-retirement. He'd focused less in recent years on making money and more on spending money to change the world. He had nonprofits and charities and he was a major opponent of President Bush's reelection in 2004.
But in 2007, Soros retook personal control of his investment funds.
Mr. GEORGE SOROS (Financier): It's the worst and most serious crisis of our lifetime.
INSKEEP: George Soros says he's come out okay so far. But he considers the financial crisis a symptom of a much larger problem, and his voice is now added to our series of conversations about the economy.
Soros offers his latest analysis in a book called "The New Paradigm for Financial Markets." Essentially, he argues with a basic economic theory. He does not believe in the collective wisdom of the markets.
Free Market thinkers believe that when millions of people all make their own best decisions, all those actions add up to the best possible economy. That belief in the market is why the U.S. has reduced government regulation for decades.
But George Soros contends there's a problem with this theory: People pass bad information to one another until the whole crowd makes bad choices.
Mr. SOROS: The idea was that regulators always make mistakes, state interference in the markets just messes things up. And that was a false idea, because the first part of it is correct. The regulators are human and bound to make mistakes. But markets are also human, and they are also bound to make mistakes. Instead of markets always being right, they're actually always groping at trying to find out what the facts are. But they never get it right.
INSKEEP: Are you saying that in the same way that the housing market turned out to be overpriced - people were just paying more than things were worth, and now they're paying the penalty for that - are you saying that America, as an investment, is overpriced?
Mr. SOROS: No, I'm not saying that. I am saying that America has, in the last 25 years, sucked up the savings of the rest of the world and consumed it and issued a large number of IOUs. These IOUs are now held in the central banks of China and other Asian exporting countries - Japan also - and oil producers. And they're worried it, that there's too much. They don't want to hold them anymore. And there isn't any good alternative to holding dollars, so actually they set up sovereign wealth funds.
INSKEEP: The countries try to invest in different places.
Mr. SOROS: That's right.
And this is actually one of the factors that has fueled energy prices, commodity prices and more recently, food prices, which is actually setting up inflationary pressures at the same time as the countries on the verge of a recession. So you have a recession and inflation at the same time. That's why this crisis is different from the previous ones.
INSKEEP: You know, when you talk about Americans spending so much money and so many dollars going overseas, in the shorter term, are Americans losing power as they accumulate more debt that they owe to people overseas?
Mr. SOROS: Undoubtedly, wealth is power, as, for instance, China is becoming much more powerful than it was and it's much more of a factor in the global economy. And they are now investing in Africa, in Asia.
The once-dominant role of the United States is now diminishing. And that is one of the factors why the value of the dollar as the undoubted reserve currency is now in question. Oil-producing countries now prefer to keep their reserves underground in the form of oil rather than to bring it out and convert it into holdings of dollars.
INSKEEP: To the extent you can tell us based on whatever information you publicly disclose, have you been betting on the dollar to keep going down or to go up at some point?
Mr. SOROS: Well, basically, I've been negative on the dollar, although I think that in the near term, it may have gone too far. You see, the financial markets are full of uncertainty. They're much more uncertain than we think. Economics has been based on the model of natural science, but social events have a different structure because of the role of thinking participants who can base their decisions on knowledge but have to have a certain bias.
INSKEEP: Well, now you're touching on something that's been discussed a lot in recent months. The phrase that's often thrown about is pricing risk. For example, if I'm a banker, how high an interest rate do I want to charge to allow for the possibility that some of my loans won't be paid back?
Mr. SOROS: Yes.
INSKEEP: And people realize that they were pricing risk too low, far too low in recent months. That leads to this question, though: When you look at the markets today, do you think that people are still under pricing risk, still too optimistic about the odds of success in most investments?
Mr. SOROS: That happens to be my view of the market, but, of course, I may be wrong, also. Just because I have this different theory doesn't mean that I'm right, because what I'm saying is that we are all wrong, and that includes me.
But I do think we have now passed through the acute phase of the credit crunch, and markets are currently breathing a sigh of relief. But the fallout in the real world and the real economy is yet to be felt. And that is not yet actually reflected in the markets. So I am actually more pessimistic about the stock market than the market itself.
INSKEEP: Well, if regulation of the markets doesn't work so well because human beings - human regulators screw up, and if the markets don't necessarily work so well because they're also run by humans who collectively screw up, what answer is left other than short-selling a lot of stock?
(Soundbite of laughter)
Mr. SOROS: No, I think financial markets are very, very flexible. They can adjust to changing circumstances. The fact that they are imperfect should not push us to abandon or constrain markets too much. We have gone overboard abandoning regulation. We mustn't go overboard abandoning markets. So while I see the dangers, I also am basically optimistic that we can learn and we can understand things better.
INSKEEP: The new book from George Soros is called "The New Paradigm for Financial Markets."
Thanks very much.
Mr. SOROS: My pleasure.
INSKEEP: And you can read an excerpt from his book "The New Paradigm for Financial Markets" at npr.org.
It's MORNING EDITION from NPR News. I'm Steve Inskeep.
RENEE MONTAGNE, host:
And I'm Renee Montagne.
NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.