Rarely in the history of human prognostication can so few words have been so prescient in so short a period of time. In the spring of 2008, the celebrated billionaire, hedge fund manager and pundit, George Soros, said that the world was in the midst of a financial crisis that was "the worst since the Great Depression" of the 1930s. Right on cue stock markets have collapsed. In the six months to late November, the Standard & Poors' 500 was down by more than 35 per cent, while the FTSE 100 tumbled by 40 per cent.
In my July 2008 Standpoint column I took issue with Soros. I didn't deny that the world economy would slow down in late 2008 and 2009, but emphasised that almost everywhere the macroeconomic numbers are far better today than they were in the 1970s or 1980s. Further, in my view a recession like that in the early 1980s was unnecessary to control inflation and unlikely in practice. My verdict was that the slowdown would be "only a blip on the path to further prosperity". Given the slump in share prices, must I now eat my words?
Soros has been vindicated so far because he saw two key points with clarity. First, as is typical after long upswings in asset prices, too many participants in financial markets had too much "leverage" in early 2008. Leverage is a fancy word for debt and the reader may wonder why I have preferred it. The answer is that in 2008, many operators did not have a plain vanilla loan, which is what we usually mean by "debt", but something more esoteric and complicated like a big risk position in derivatives.