Soros Sees End of Dollar-Backed Credit Expansion

Billionaire investor George Soros said the fallout from the U.S. subprime crisis will bring about the end of a 60-year dollar-based credit boom.

“The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,” Soros said in a debate today at the World Economic Forum in Davos, Switzerland. “Now the rest of the world is increasingly unwilling to accumulate dollars.”

Rising defaults on U.S. subprime mortgages sparked a rout in the credit markets in August, leading banks to cut money for consumer lending, hurting the U.S. economy’s main engine. The Fed yesterday lowered its benchmark rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London amid signs the world’s largest economy is sliding into recession.

“The dollar is still the most important reserve currency and will remain so,” Soros said in a later interview at his Davos hotel. “This is the end of credit expansion based on the mistaken belief of market fundamentalism, that you should let markets have total freedom.”

`Gone Too Far’

Soros made $1 billion in 1992 betting against the pound, forcing the British government to abandon a peg to a basket of European currencies. He was also the biggest financial backer of the failed effort to deny President George W. Bush a second term in office. The euro has gained 55 percent against the dollar since Bush entered the White House on Jan. 21, 2001.

“From the 1980s we had the belief in the magic of the marketplace, and the authorities were so successful that they started to believe in this market fundamentalism,” he said. “That’s gone too far.” In times of crisis, “they suspended the rules and they bailed out the banks. That created an asymmetric incentive system, a moral hazard, that allowed the expansion of credit.”

Soros has used past appearances in Davos to predict the dollar’s decline. In January 2004, he said the U.S. currency would drop for a third year. It then fell 7 percent, according to a Federal Reserve trade-weighted index of the currency.

Stephen Roach, chairman of Morgan Stanley in Asia, said in Davos that while he remains a “dollar bear,” the U.S. currency’s slide may be reversed in the first half of this year as other economies in Asia and Europe are hurt by the U.S. slowdown.

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