So, how did this multi-billionaire and self proclaimed philanthropist make his money? Wall Street. (
) Yep, he was one of those evil hedge funders, and currency speculators. As a currency speculator, back in 1992, he became known in England as the 'man who broke the Bank of England'. So what? Big deal, right? He shorted the British pound by leveraging billions of pounds of financial bets. But.... he didn't just 'break' the Bank of England. He broke the British economy, and with it, the livelihoods of hundreds of thousands of ordinary hard working Britons, who lost their homes, their jobs, their pensions and their life savings. Why? Because he could. Because making money was more important than ordinary, hard working people - albeit they were not Americans.
This is factually incorrect. He did not break the British economy. He did not cause people to lose their jobs. He did not cause pensions to be wiped out. Nobody lost their life savings because of Soros. In fact, it is quite the opposite. George Soros probably did more to create employment and economic growth in the UK during the early and mid-90s than any other single individual.
Conservatives have demonized George Soros so much and have developed such deep pathological biases against the man, they essentially argue for government intervention and that government knows better than the market. Conservatives shouldn't condemn Soros for breaking the Bank of England. Conservatives should applaud Soros. At least those conservatives who believe in free markets. Because if you believe in free markets, Soros unshackled the currency markets which allowed the pound to fall to its true market level.
A quick Google search would have shown that in fact, the British economy accelerated after Soros broke the Bank of England. You can see the graph here.
World Bank, World Development Indicators - Google Public Data Explorer
The pound was forced out of the ERM - the forerunner of the euro - by Soros in September 1992. GDP growth was as follows;
1991 -1.4%
1992 +0.1%
1993 +2.2%
1994 +4.3%
The pound was pegged within a band against the mark in what was known as the European Exchange Rate Mechanism (ERM). The peg was set through monetary policy via the Bank of England, i.e. the government's bank set the interest rate. If the government wanted a strong pound, it raised the interest rates. If it wanted a weak pound, it lowered interest rates. The pound was supposed to trade with a band of DM2.80-DM3.20. The currency market did not trade freely. In fact, it was very much the opposite. The free market was not allowed to work as the British government kept the pound artificially strong to keep it within the ERM.
To combat inflation in the late 1980s and early 1990s - which got as high as 11% - the Bank of England jacked up interest rates to nearly 15%. This caused the British economy to grind to a halt as economic growth turned negative in 1991. The monetary policy worked as inflation fell to 3.5% by the summer of 1992. Here are the data sets for interest rates and inflation.
http://www.ons.gov.uk/ons/rel/cpi/c...011/cpi-and-rpi-detailed-reference-tables.xls
http://www.google.com/url?sa=t&rct=...sg=AFQjCNEROveCPdE410lbKccZSrg9pioyKA&cad=rja
However, interest rates were nearly 10% in the summer of 1992, meaning real rates of interest were 6.5%, which is extraordinarily tight. (In a normal environment, real interest rates are 2%-3%.) This was strangling the British economy. Interest rates should have been much lower. Soros knew it. If the Bank of England had lowered the Bank Rate - as it should have, given the economic fundamentals - then the pound would have declined below its lower band in the ERM. But the British government wanted to stay within the ERM. They wanted to save face. The pound was artificially high and kept high because the UK was in the ERM.
If you believe in the efficacy of markets, you knew this was simply untenable, no different than Greece's predicament in the eurozone today. So Soros - as he should have - bet heavily against the pound.
And the markets believed him. If you believe in markets, and if Soros had been wrong, the pound would have quickly risen after it fell out of the ERM. But that's not what happened, as you can see here.
Also, if Soros had been wrong, the British government could have maintained their high interest rates. But they did not. Instead, they slashed interest rates, knowing that the battle to keep the pound in the ERM was lost. No longer needing to keep interest rates high to defend the value of the pound, the Bank Rate was slashed from 9.875% in the summer of 1992 to 6.875% in November and eventually to 5.125% in 1994.
And what happened? Well, as conventional monetary theory would expect, the economy recovered. Monetary policy works with a lag of 12-24 months. Unemployment, which was 9.9% in September 1992, after having risen from 6.9% two years earlier, peaked a year later and was below 10% at the start of 1994, beginning a long, downward trek in unemployment for years thereafter.
You can see employment by downloading this table, which is table A02
http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/october-2011/table-a02.xls
Release Edition Reference Tables
The same came be said of the Asian Contagion in 1997. Politicians love to demonize outsiders for their woes, and the leaders of various SE Asian countries did just that as their economies collapsed in 1997 and 1998. Soros, who was very public in his attack on the British pound, denied any involvement in shorting the Asian currencies. In fact, at the time, he said he was slightly long Asian currencies. I don't know if that's true or not, but the simple fact is that like Britain five years earlier, the Asian economies had pegged their currencies, only this time to the dollar, which created enormous imbalances in the economies. It was only a matter of time - if you believe in free markets - before the system collapsed. And it did.
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Pure-Comedy-GOLD!!
