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"enormous transfers of wealth take place from the sheep to the wolves"
May 19, 2014 4:58 AM   Subscribe

"In 1992, George Soros brought the Bank of England to its knees. In the process, he pocketed over a billion dollars. Making a billion dollars is by all accounts pretty cool. But demolishing the monetary system of Great Britain in a single day with an elegantly constructed bet against its currency? That’s the stuff of legends."
posted by MartinWisse (69 comments total) 21 users marked this as a favorite

 
Soros is also implicated in crashing the Malaysian Ringgit in 1997. Real nice guy.
posted by Chocolate Pickle at 5:07 AM on May 19 [2 favorites]


Anyone making a billion dollars on one deal (or a hundred different deals) is immediately suspect to me, as a rule. "Pretty cool" are not words I would use to describe them.
posted by Foosnark at 5:10 AM on May 19 [9 favorites]


Isn't it amazing what you can extract surplus value from, if you just put your mind to it?
posted by radicalawyer at 5:12 AM on May 19 [1 favorite]


Soros' actions were the equivalent of a guy lighting a match after everyone else has been telling the gas company for months there was a leak.

He didn't make anything happen. He just found a way to profit from untenable economic policy. Clearly no value to society there and I've no problem with taxing a windfall if that's what people want but don't blame him for bad currency pegs.
posted by JPD at 5:23 AM on May 19 [29 favorites]


Yeah, but ... Soros.
posted by ZenMasterThis at 5:23 AM on May 19 [1 favorite]


Soros' actions were the equivalent of a guy lighting a match after everyone else has been telling the gas company for months there was a leak.

He didn't make anything happen.


As you say, he lit the match. To use another metaphor, he turned an orderly procession out of a theater into a panicked stampede by yelling "Fire!" Might someone else have done it? Sure. But he did it nonetheless.
posted by Etrigan at 5:29 AM on May 19 [9 favorites]


No there wasn't an orderly March out going on. Markets don't fix themselves like that.
posted by JPD at 5:33 AM on May 19 [8 favorites]


Someone or something was going to do it.
posted by JPD at 5:34 AM on May 19


I have the same opinion of the first person to light the match that I do of the people that were thinking of lighting the match but didn't get it out of their pockets in time: they're all assholes.
posted by Slackermagee at 5:35 AM on May 19 [7 favorites]


The article makes it clear that the Germans were talking the Pounds down. It's also clear that if people were selling Pounds to buy Deutschmarks, then other countries (e.g., Germany) could have sold Deutschmarks and bought Pounds. A concerted effort would have made it clear that the Pound was defended, and people would have stopped lending to Soros. So why didn't they? Because it was in Germany's interest to bring the UK down a bit, and this was a good way to do it: they simultaneously weakened and embarressed the UK, and they strengthened their own currency. A nice trick, and Soros copped all tje blame.
posted by Joe in Australia at 5:36 AM on May 19 [14 favorites]


Someone or something was going to do it.

Yes, and Soros did it. He wasn't alone in making it happen, but he made it happen.
posted by Etrigan at 5:38 AM on May 19


No it was inevitable. Hell - the longer it went on the worse the outcome was going to be.


I can give you several examples of Macro trades that guys have been trying to make happen - in some cases (Japan) for decades. If the imbalance hasn't already reached unsustainable levels they don't usually work. This stuff isn't manufactured out of thin air, and imbalances like this always correct themselves in a violent disruptive fashion.
posted by JPD at 5:43 AM on May 19 [8 favorites]


It's just not true that Soros made it happen. Markets in huge and profoundly liquid things like reserve currencies simply cannot be manipulated in any ordinary sense of the word. Indeed, one of the main reasons why markets can stay irrational for a long time is that it is hard to make money shorting even irrationally overpriced things. The mortgage market is a great example: the fund that put on the "big short" had the right macro analysis, and clever structures -- but they mainly made money because their timing was better than that of many people who thought mortgages were overpriced in 2001, 2002, 2004, etc. Also, an absolutely small proportion of the total decline in that market actually flowed back to them.
posted by MattD at 5:51 AM on May 19 [14 favorites]


No it was inevitable. Hell - the longer it went on the worse the outcome was going to be.

Furthermore, an overvalued exchange rate is a bad thing for your economy. It's pretty odd to hop onto metafilter, where any mention of Thatcher seems to provoke repeated howls of how all the horrible things to happen to British manufacturing to happen on her watch, but now people are talking about how horrible it is that someone "broke" an overvalued exchange rate. What do you think happens to manufacturing with an overvalued rate? Soros isn't the guy to be mad at, the people to be mad at are the BOE folks who just wasted their money on a complete fool's errand.
posted by dsfan at 5:54 AM on May 19 [11 favorites]


Every conceivable action is trivially defensible by simply proclaiming "...but, The Market demands it!!"

Whether Soros is, or is not, a dick is a separate concern.
posted by aramaic at 5:54 AM on May 19 [5 favorites]


What do you think happens to manufacturing with an overvalued rate? Soros isn't the guy to be mad at, the people to be mad at are the BOE folks who just wasted their money on a complete fool's errand.

The BOE wasn't independent at the time, right, so the buck really stops with John Majors on that one.
posted by dismas at 5:59 AM on May 19 [3 favorites]


That's not really the defense being made. You know that right?

MattD with respect the ERM I think you're kind of wrong. Although it wasn't just Soros who was piling into that trade. The UK's entrance into the mechanism wasn't that much before it was blown up.
posted by JPD at 6:00 AM on May 19 [1 favorite]


This is why it's Brilliant that the Dollar is backed by nothing... we can't run out of promises.
posted by MikeWarot at 6:01 AM on May 19 [1 favorite]


The BOE wasn't independent at the time, right, so the buck really stops with John Majors on that one.

That's fair, at least regarding formal independence, which IIRC was later in the 1990s. Major was also an ERM proponent in the first place, so definitely deserving of blame here.
posted by dsfan at 6:04 AM on May 19


there's also blame to be placed at the process that determined the bands in the ERM no? That's essentially what the problem was - not that the currency peg existed but that the GBP was pegged too high.
posted by JPD at 6:07 AM on May 19 [1 favorite]


It's not the burglar's fault! The combination of the safe was really easy to guess!
posted by The Underpants Monster at 6:17 AM on May 19 [1 favorite]


It's not the burglar's fault! The combination of the safe was really easy to guess!

Yes, let's not even pretend to engage different points of view.
posted by spaltavian at 6:18 AM on May 19 [17 favorites]


The article makes it clear that the Germans were talking the Pounds down

No. The decision by the UK Government to tie the Pound to the Deutschmark -- a currency they had no control over -- is what took the pound down. The decision to defend that decision despite the fact that there was no way to maintain the tie in the face of a massive arbitrage is what cost the UK taxpayer billions of dollars. Had Major allow interest rates to spike immediately, or broken the EDM tie that morning, Black Wednesday would have been avoided. Instead, they defended by buying, only midday did they try to raise rates, and they didn't raise them nearly enough to make a difference. And yet, they stayed in the EDM for the entire day, and they bled money doing it.

The reason the UK made this decision was that John Major wanted a mechanism to say "Sorry, I know your in trouble but we can't lower interest rates or spend money without breaking our EDM agreement." Basically, he wanted a legal mechanism to allow him to cut spending without taking the political heat.

Margaret Thatcher either just hated Europe that much or spotted the trap, and fought against joining the EDM, but when she fell out of favor and Major took over the Tories, joining the EDM was a cornerstone of his policy. You can argue that most of her policies were wrong, wrong, wrong -- but her opposition to joining the EDM was exactly right.

Incidentally, Black Wednesday is one of the big reasons why it will be years at a minimum before the UK joins the Euro, and arguably, is the big reason why it never will. (Well, that and the Italy/Spain/Greece crisis.)
posted by eriko at 6:18 AM on May 19 [14 favorites]


Soros isn't the guy to be mad at, the people to be mad at are the BOE folks who just wasted their money on a complete fool's errand.

They got bullied overnight by huge financial goons who were colluding to ensure that natural "market" forces (which respond to huge interest rate spikes in almost every other scenario) were completely powerless.

They had all of 12 hours to attempt to right the ship, against a system that attracts the best and the brightest by the prospect they can make a billion of dollars overnight, and under the auspices of losing your job if you raise interest rates and the economy tanks.

But sure, if you want to blame the person who not only has to balance the public purse, but also had to ensure that these same fickle financial players continue to invest in his country, then go ahead. It's what Soros and his gang of thugs want - for everyone to believe it's a fair game and the public are just losing it because they're less competent.
posted by rutabega at 6:27 AM on May 19 [12 favorites]


The BoE was telling the government to raise rates for quite a long period of time before the crisis itself happened. The refusal to do so was political.
posted by JPD at 6:30 AM on May 19 [3 favorites]


One thing I've never quite understood was whether the UK's — really, Major's — interest in joining the Exchange Rate Mechanism was, as sometimes claimed, part of a desire to help Europe and promote trade, or whether it was really about trying to use the ERM to keep "ahead" (insofar as having a strong currency was seen as a good thing) of the Germans. The stated reasons were all about trade, your basic pro-Euro stuff, but it never seemed to quite wash.
posted by Kadin2048 at 6:33 AM on May 19


now refers to September 17th, 1992 as "Black Wednesday;" George Soros, however, probably calls it something like "Awesome Wednesday."
posted by Reasonably Everything Happens at 6:49 AM on May 19 [2 favorites]


The BoE was telling the government to raise rates for quite a long period of time before the crisis itself happened. The refusal to do so was political.

The BoE hasn't the breadth and the depth of economic responsibility that the PM does. Increased or even steady unemployment in a recession isn't politically palatable - not for ideological grounds, but because the public simply won't have it and will sack you and replace you with people you think will do worse.

There is plenty of good hindsight to be had here (i.e., had Britain held its foreign reserves and let the anchor go, they'd have made a pretty penny) but it's intensely problematic to look at the act of a few individuals in one scenario and not look at the broader context that it occurred in, and continues to occur in.

Modern monetary policy is becoming more and more helpless against countries and hedge funds who don't care where they get their money from, so long as they get it, and while we might wax poetic about fixing that, keep in mind the best minds in the financial game right now ALL work for the hedge funds.

They've got the brains and the brawn and they're willing to force that will on a country no matter what the impact is.
posted by rutabega at 6:51 AM on May 19 [4 favorites]


I must be stupid, because I can never understand how shorting works. So you agree to buy something in the future, at a time you pick not in advance, for whatever it's worth then, and then sell it now? Why would anyone agree to selling shares on those terms? So they make interest? But surely the interest they make would be less than the shares themselves, and hugely risky if they drop in value?

Can anyone explain shorting for spazzos like me?
posted by selfish at 6:56 AM on May 19 [1 favorite]


Soros used to be a partner with Jim Rogers in the Quantum Fund, which had a spectacular run back in the seventies. They had a falling out. Way Rogers tells it, Soros was accused of some kind of malfeasance and settled for a million dollars. Rogers said he should fight it, to maintain his, and the fund's, good name. Soros then admitted said malfeasance to his partner, but said it was worth the million dollars.

They split soon after. (I forget the details; the curious can find them in Street Smarts.) (Soros on Rogers here.)

Can anyone explain shorting for spazzos like me?

Try this. Or this.
posted by IndigoJones at 7:05 AM on May 19


They got bullied overnight by huge financial goons

RTFA.

The short only worked because it was inevitable. As said by others above, it was Major's gambit to keep a politically lucrative, but ultimately bad monetary policy.
posted by Reasonably Everything Happens at 7:08 AM on May 19 [2 favorites]


Selfish -- people short things either because they think they will trade down ("outright") or that will trade down more than something they are simultaneously buying ("hedge").

If you borrow and sell it at 50, and buy it back at 40 to return to the lender, you've just made 10, less whatever you paid to the lender as interest, which is usually very small by comparison (say, 1).

People lend to shorts because they think something will stay the same or trade up, and they get more income in the meantime than if they hadn't lent out, and as a bonus get the potential of a short squeeze, where something heavily shorted starts to trade up, which forces the shorts to buy at any price to avoid losing even more money, and drives the price even higher ("short squeeze.")
posted by MattD at 7:09 AM on May 19 [1 favorite]


Can anyone explain shorting for spazzos like me?

I borrow say your car for a week. On Monday I find someone willing to buy your car from me for $5000. I think I saw an ad for your exact same car for sale for $3000.

I sell your car for $5000, buy that other car for $3000. I give you a car back (same make, model. color, mileage) and I made 2000 dollars.

Of course if I was wrong about that ad - I still have to give you a car back. Even if it costs me 25k.
posted by JPD at 7:10 AM on May 19 [13 favorites]


Fuck Richard Nixon (and friends) for blowing up Bretton Woods in the first place. It's been all downhill for the working stiff ever since.

These assholes have the "money for nothing" part down; it's a good thing that the chicks aren't free.
posted by CincyBlues at 7:12 AM on May 19 [2 favorites]


The BoE hasn't the breadth and the depth of economic responsibility that the PM does. Increased or even steady unemployment in a recession isn't politically palatable - not for ideological grounds, but because the public simply won't have it and will sack you and replace you with people you think will do worse.

You miss the point. The PM's own advisors were telling him that the current state of affairs was untenable. There were no financial goons bullying anyone. The finance people on both sides knew what needed to be done - but because of politics the guys who could have acted six months or a year earlier to prevent the whole debacle (or at worse minimized it) didn't.
posted by JPD at 7:13 AM on May 19 [7 favorites]


tl;dr: "How the Bank of England destroyed the pound by mismanaging interest rates while trying to keep the value artificially high". As many folks have said in this thread, you can't simultaneously have a free market in a currency, try to keep the currency value high, and try to keep the interest rates low. Someone's going to step in and trade that discrepancy. The brutal part is how Soros (and others) stepped in and did it so fast. A huge short position like that makes things happen very quickly. It's just crazy to see a private financier win a game of chicken against a national bank.

China's financial policy is in a somewhat similar position right now; the renminbi is artificially low against the dollar and Chinese central bank policy is to keep interest rates low. A big part of how they maintain the position is that the renminbi is not completely freely traded in an open market. Also there's some escape valves to let off steam, like the shadow banking system with higher interest rates.

I've had a soft spot in my heart for Soros since the late 90s, when a colleague invited me to teach for a summer at the Central European University in Budapest. It's a new university, set to teach Western-style social sciences in the post-Soviet world to fill the void of 80 years of Marxist-only thinking. It was a bit nutty but I met a lot of very, very smart Eastern Europeans and had a good time for a summer in Hungary. So win for me!

Soros has spent his late life doing a variety of philanthropic activities with some of the vast wealth he accumulated. The university is one thing, but the Open Society Foundation is another. His giving isn't purely charitable, it's not quite on the scale of Gates stopping malaria for the good of the world. Soros has a very specific social and political agenda with his funding. But it's an agenda I somewhat agree with and a lot of the money ends up doing good things, so overall I'm impressed.
posted by Nelson at 7:31 AM on May 19 [9 favorites]


Fuck Richard Nixon (and friends) for blowing up Bretton Woods in the first place.

If Nixon hadn't, someone could have pulled a Soros move against the dollar.

Basically, Nixon did what Majors didn't have the balls to do (for various reasons). There was no way that the US could have maintained the dollar/gold peg — which was the cornerstone of Bretton Woods — without paying every foreign government who wanted to make some money literal tons of gold. The US would have gone broke if they'd tried to maintain it, and the absolute evidence of this is that the UK tried.

Also, the US wasn't the first to leave Bretton Woods. The West Germans pulled out first. So if you want to lay blame for being the first mover, look there.

Once that happened, and other countries started to demand gold for their dollars (the French in particular), the system was basically dead: the US could only have expensively prolonged the peg, but probably not saved it, by doing what the UK did against Soros and trying to buy its way out of the problem.

Nixon was a pig, but the decision to end Bretton Woods, given the initial moves already made by the Germans and the French and the Swiss, was the correct one at the time.

That life has basically sucked for US workers ever since is something I won't really dispute, but I think the blame there lies with trade rather than strictly with monetary policy. We'd be just as fucked (actually, probably much more fucked) with a gold-pegged dollar than with a floating fiat dollar.
posted by Kadin2048 at 7:50 AM on May 19 [12 favorites]


Forcing the UK to abandon the ERM lead directly to the UK adopting economic policies that reduced unemployment and restored economic growth.
posted by humanfont at 7:50 AM on May 19


The British government essentially made an offer of free money to anybody that wanted to short the pound, and Soros took them up on it.
posted by empath at 7:58 AM on May 19 [3 favorites]


You miss the point. The PM's own advisors were telling him that the current state of affairs was untenable.

SOME of his own advisors. Some were advising that the domestic impact of intervening was going to be very negative. There were a number of clear policy narratives going on at the time.

The passing of time means only those voices who, in hindsight, can shout "I was right" are remembered, but there was not a unilateral believe that any particular moment was the right time to act.

I think looking back, Major didn't expect what happened to happen in such short-order and that was a huge error. However, part of the reason this story is so fantastic is the sheer size and resolve and how it brought one of the world's major public banks to its knees. It showed how market responses to monetary policy can and will be resisted if the forces are aligned enough.

So while everyone knew the situation was untenable over the long-term, nobody saw in the short-term the way it would go down. If Soros was out on a limb by himself, he'd have never made it - but the pile-on (and particularly the hold against intervention) occurred and he won.

A nice chess move, and history is written by the winners, but it was a huge alarm bell that has been rung a number of times since that the public will be burned to whatever degree is possible. A lot of domestic policy is now shaped by the idea that sharks are out there waiting to bite (and/or need to be coaxed to swim at all), and not based on what's best for the country.

This is why I think ignoring the context this exists in is a problem. There doesn't go a day where huge amounts of capital are playing chicken against governments and slowly, but surely, governments are losing the battle and are running out of ammo in the war.
posted by rutabega at 8:07 AM on May 19 [4 favorites]


Fuck Richard Nixon (and friends) for blowing up Bretton Woods in the first place. It's been all downhill for the working stiff ever since.

What? Blowing up Bretton Woods didn't stiff the working class. If anything, Bretton Woods was a hole allowing gold to flow out of as it appreciated past $35. Allowing China to import manufactured goods produced at slave wages with no tariffs and then standing by doing nothing as China repeatedly devauled the yuan in the 80s is what fucked the working class.

But hey, so long as we can buy a three pack of black t-shirts at Walmart for $12, right?
posted by Talez at 8:17 AM on May 19 [7 favorites]


Someone or something was going to do it.

Can't the same logic be applied to the financial institutions here in the U.S. that took advantage of shitty lending policy and lack of regulation around instruments such as credit default swaps leading up to the collapse of the housing market? I don't know how comfortable I am with that.
posted by echocollate at 8:18 AM on May 19


The advisors for him getting re-elected were telling him not to raise rates.

A lot of domestic policy is now shaped by the idea that sharks are out there waiting to bite (and/or need to be coaxed to swim at all), and not based on what's best for the country.

This is true, but mostly because people remember the crisis that resulted from failing of monetary policy (and pretty much every debt crisis of the post-Bretton Woods era has been because of bad monetary policy) as being caused by fiscal issues.

Its bullshit, but that's not what happened here.
posted by JPD at 8:18 AM on May 19


Can't the same logic be applied to the financial institutions here in the U.S. that took advantage of shitty lending policy and lack of regulation around instruments such as credit default swaps leading up to the collapse of the housing market?

No, because they were purposely and knowingly obsuring and lying about the bad debt thety put into instruements they created.

There's a difference between profiting off your own malfeasance and profiting off someone else's incompetence.
posted by spaltavian at 8:34 AM on May 19 [2 favorites]


>They got bullied overnight by huge financial goons who were colluding to ensure that natural "market" forces (which respond to huge interest rate spikes in almost every other scenario) were completely powerless.

I work for a major world central bank in economic research, and my dissertation adviser has close ties to the BOE, which were a major part of our research. Your post is not exactly correct. Major sovereign nations are incredible robust. This wasn't a matter of being bullied, this was a matter of the BOE enacting awful exchange rate policies, and the capital market pricing mechanism punishing them for pushing foreign exchange rates out of equilibrium. The market always wants to return to equilibrium, and we have a long economic history showing that there are no half-measures when the government wants to use policy to keep us out of economic equilibrium.

You either go all out like China, where you not only have full and absolute authority over central banking, and would jail anyone who threatened the financial infrastructure. Or you keep a generally floating and open market, as the US and the UK (more or less) do these days. If you try to find an inbetween you will be punished, as you are literally placing stacks of money on the table and expecting investors to not legally pick it up. From a policy standpoint, that's not smart. Good policy needs to assume and understand people are self-interested and look out for themselves, and allow them to do that without undermining the system.
posted by jjmoney at 9:12 AM on May 19 [18 favorites]


dsfan: "That's fair, at least regarding formal independence, which IIRC was later in the 1990s."

Announced 1997, though I think it took formal effect in 1998. It was one of the first policy moves by the new Blair government.
posted by Chrysostom at 9:18 AM on May 19


Kadin2048 and Talez;

You guys make reasonable points, but in defense of my (poorly framed?) snark, here goes:

I agree that the gold-peg was untenable but that had been known for years before 1971. Nixon's abrupt regime of policy changes (including wage and price controls, etc...) was (imo) an attempt to continue US economic dominance in a world which had seen a greater diffusion of trade and its concomitant power among (mostly) those who were completely disadvantaged at the end of WWII.

It's my position that the movement towards a worldwide free-floating currencies (which only took a couple of years to fully develop post Nixon's 1971 moves) has, in fact, played a major role in creating the conditions which have gone a long way towards destroying the working class simply because it allowed private entities (and characters like Soros) to dominate what should be the province of government. That 1971 moment was a key turning point in the process of so-called globalization.

I say so-called because what had transpired in the decades since is not truly globalization. That series of crises could have provided impetus for a truly cosmopolitan world economic system but instead what we have gotten is a bunch of "double-down" bets on an original bad decision.

What should have happened was a more justly negotiated new series of currency pegs which acknowledged the growing power and importance of other economies. And no, in case you all bring it up, shifting power to the IMF and IBRD doesn't count.

Of course, much of what I would like the world to have done in times such as those is semi-utopian and tends to downplay the down-and-dirty politics which occur. I acknowledge that.
posted by CincyBlues at 9:20 AM on May 19


Soros did a big favor to the British public. Keep in mind that John Major was an advocate of the currency peg because it intentionally put austerity handcuffs on the government. It prevented the government from taking the steps necessary to recover from recessions and help the unemployed. It is the same austerity strategy employed by Cameron today only on a "voluntary" basis. After Black Wednesday, the necessary devaluation occurred and was followed by robust GDP growth and reduced unemployment. It improved conditions for British workers.

Don't be confused by the terms strong and weak currency. People often mistakenly interpret a strong currency as a point of pride, like a strong military. But for the middle and lower class, a strong currency is a bad thing. A strong currency makes imports cheap and boosts importing companies like Walmart. At the same time, a strong currency puts domestic workers at a disadvantage, increasing the cost of domestic manufactured goods sold overseas, reducing exports and putting domestic laborers out of work. A strong currency is the same as a tariff tax placed on goods made in the U.S. to be sold to foreign countries. Why would you want to put a tariff on your own exports?

You can thank Clinton and his financial stooges Robert Rubin and Larry Summers for the "strong dollar" policy that has been at the core of the trade deficit explosion of the 90s and the stagnation of U.S. labor ever since.

You see the same strong currency damage in the Euro zone. Workers in Spain, Italy and Greece are suffering immense pain because the pegged currency has prevented devaluation that would allow their economies to adjust and become more competitive and productive.
posted by JackFlash at 9:21 AM on May 19 [5 favorites]


JPD: Soros' actions were the equivalent of a guy lighting a match after everyone else has been telling the gas company for months there was a leak.

Let me get this straight. Your defense of him is that he's no worse than an arsonist who blows up gas lines?

And that makes him "OK" to you?
posted by IAmBroom at 9:22 AM on May 19 [1 favorite]


So he made a killing and now funds all sorts of progressive ventures. Do you want people on the left to counteract the Koch brothers or not?
posted by planetesimal at 9:29 AM on May 19 [1 favorite]


Right. So what we need now is a League-of-Nations-style universal agreement, a "New Bretton Woods" between all major trading partners, pegging the various currencies to ...

Bitcoin.




I'll just leave now.
posted by eclectist at 9:36 AM on May 19 [3 favorites]


It's my position that the movement towards a worldwide free-floating currencies (which only took a couple of years to fully develop post Nixon's 1971 moves) has, in fact, played a major role in creating the conditions which have gone a long way towards destroying the working class simply because it allowed private entities (and characters like Soros) to dominate what should be the province of government. That 1971 moment was a key turning point in the process of so-called globalization.

The alternative would have the government buy gold at outrageous prices to back US$35 in currency or have them devalue the currency. When the Nixon shock took effect the price of gold was already north of $50 and the US had just sent something in the region of US$240 million of gold overseas on reserves of $13.2 billion. The situation as it stood was completely untenable. If it had continued it would have bankrupted the US treasury and would have been the biggest transfer of wealth away from The People in history.

If anything, the breaking of Bretton Woods is what's allowed the US standard of living to continue far in excess of what its economy (and the trade deficits) should have been able to support.
posted by Talez at 9:42 AM on May 19 [2 favorites]


A strong currency is not a universally bad thing. Without a strong currency, companies tend to stick with relying on cheap exports for profits rather than spending on R&D and innovation that lead to new products and higher-tier services. A strong currency hurts exports but keep in mind that in the long run, a nation shouldn't rely on cheap exports for their GDP growth. Look at the middle income trap that developing countries fall into by virtue of cheap exports.

(Which is not to say the BoE's position was tenable -- it wasn't and the devaluation was much needed. But just wanted to point out that a weak currency shouldn't be the end goal and even China has been allowing the CNY to appreciate slowly, concomitant to their economy's 'developedness".)
posted by tksh at 9:46 AM on May 19


A strong currency is not a universally bad thing. Without a strong currency, companies tend to stick with relying on cheap exports for profits rather than spending on R&D and innovation that lead to new products and higher-tier services. A strong currency hurts exports but keep in mind that in the long run, a nation shouldn't rely on cheap exports for their GDP growth. Look at the middle income trap that developing countries fall into by virtue of cheap exports.

A lot of those countries have seen their economies devastated by corruption and an inability to get money into the middle class to kick start domestic demand. Japan and Korea for instance stand out as economies that have been developed off the back of export orientated industries but plowed money into education and the middle class to start their transition to innovative and higher value industries.

Brazil on the other hand lined the pockets of their own rich and have been stuck in the middle income trap ever since.

A strong currency is a symptom not the cause. Without the political will to stand up to plutocrats and stuff large amounts of money into the lower and middle class, an economy will stay perpetually in the middle class trap.
posted by Talez at 10:04 AM on May 19 [2 favorites]


It was a fight between the city and westminster and the city won and we are now reaping what was sown: LIBOR/PPI/CDO. In fact, the reason the hospitals in the UK are in the red and closing wards and laying off nurses is because the banks own the PFI and it is to them we are paying the interest. They won on that day, and have taken a bigger and bigger share of the UK pie.
posted by marienbad at 10:14 AM on May 19


Fifty-five comments and still nobody's so much as mentioned the man whose actual job this was at the time.

This is, sadly, just one item in a list of things Norman Lamont Is or Was Wrong About; a list so long you could wrap it around the earth more than once.
posted by genghis at 10:23 AM on May 19 [2 favorites]


If it had continued it would have bankrupted the US treasury and would have been the biggest transfer of wealth away from The People in history.

You posed one alternative, Talez, not the only one. But here's my quibble: Gold isn't wealth, it's just another kind of consumption ticket. The source of wealth isn't a pretty metal, nor for that matter is any other mutually agreed upon medium of exchange. The source of wealth is human ingenuity, creativity, and a little dirt under the fingernails. Nothing less.

So, in 1971, a period of which it would be fair to say that the world was suffering a series of mini-existential crises, the elites of this world chose a path which essentially abdicated the concept of government in the interest of the general welfare in favor of corporate personhood over people, of arbitrageurs over producers, of parasites over working class makers-of-things.

Granted, the Nixon decisions were not the sole cause of the fruitless harvest we reap today; but it was a critical, and nascent, moment in turning the world upside down and allowing the FIRE sector of the economy to accrue greater and greater influence in policy-making at the expense of most of the population.

Just as it took 30 years for the post WWII Bretton Woods system to reveal its cracks, it has taken 40 for the true harm done by the decisions of 1971--or better said the dynamic propelled forward by those decisions--to totally screw the pooch.

Bankruptcy at least gives one a chance to start over. There are a shitload of kids with college loans who would love to have the same possibility today. But the "dynamic" has taken measures to preclude that, hasn't it?

Apologies for the derail, folks. I'm done for the day. This Soros business. Eh, basically the story of a thief stealing from a burglar.
posted by CincyBlues at 11:22 AM on May 19 [2 favorites]


>> Can't the same logic be applied to the financial institutions here in the U.S. that took advantage of shitty lending policy and lack of regulation around instruments such as credit default swaps leading up to the collapse of the housing market?

> No, because they were purposely and knowingly obsuring and lying about the bad debt thety put into instruements they created.

> There's a difference between profiting off your own malfeasance and profiting off someone else's incompetence.


The synthetic CDS financial engineers and the ratings agencies were operating in bad faith for the bottom line, but legislators' incompetence at regulating Wall St. built the system that allowed that. Campaign finance built the system where competence at garnering contributions is more important than the job done while elected. At what point do you stop blaming the water for going down the drain?
posted by morganw at 3:00 PM on May 19


I must be stupid, because I can never understand how shorting works. So you agree to buy something in the future, at a time you pick not in advance, for whatever it's worth then, and then sell it now? Why would anyone agree to selling shares on those terms? So they make interest? But surely the interest they make would be less than the shares themselves, and hugely risky if they drop in value?

Can anyone explain shorting for spazzos like me?


1) They may actually be legit using the transaction to reduce the risk, ie What These Things Were Designed For. A very simplistic example, say a manufacturing company in Germany knows it has to pay a tax return in British Pounds for their overseas operations in a month's time and sees the situation is very volatile. They're a Germany company with German investors producing financial reports in Marks. Company policy would be to eliminate all exchange risks where possible (after all, they're not in the business of currency speculation, their core business is manufacturing). So they would take up the position opposite to Soros - they would prefer to "take" the known exchange rate of Pounds right now, and in a months time they just receive exactly X amount of British Pounds from Soros to use to pay their tax return. Any exchange risk or benefit in the interim period is going to be taken by Soros. The company is perfectly happy with this arrangement, and Soros benefits hugely. Sure the company could have "speculated" on the Pound and let their exchange risk go uncovered, but that's really really against company policy. Their shareholders expect them to focus on building widgets.... not randomly play the stock market with their money! There are precedents for this, though Porsche vs Volkswagen...

2) They might be other speculators or brokers who're doing it for pure profit reasons. Either they believe Soros was wrong in his direction of prediction (they think the Pound is going to go up) or they believe Soros was wrong in his magnitude of prediction (they think the Pound is going to go down too, but not as much, and they will charge him the appropriate borrowing fee on the transaction so they still make money) I would assume that as Soros short sold more and more he would have depleted the amounts of currency the brokers had access to and he would have had to pay a higher and higher borrowing fee for it. But it would still have been nothing compared to the profits Soros would make later.
posted by xdvesper at 7:14 PM on May 19


So you agree to buy something in the future, at a time you pick not in advance, for whatever it's worth then, and then sell it now? Why would anyone agree to selling shares on those terms? So they make interest? But surely the interest they make would be less than the shares themselves, and hugely risky if they drop in value?

Why does someone call your bet in poker when you go all in? They think they have the better hand. It's basically gambling on both sides of the deal.
posted by empath at 7:19 PM on May 19 [1 favorite]


I think what selfish is asking is more along the lines of "why would anyone lend their shares out to be shorted?" After all, if the other guy is right, then the price has moved against you and you'd rather have sold.

The answer is, they think the shorter is wrong, and they're getting paid to lend the shares. If you're going to hold onto the shares anyway, then you can make a little money following the same course you'd have already taken.
posted by RustyBrooks at 7:20 PM on May 19 [1 favorite]


There are people who have to own particular shares, like funds that need to reflect the capitalisation of the share market: they need to own GM shares, even if they think it's a generally bad investment. So they may as well lend the shares out and make some money. Other examples would be trustees that aren't allowed to sell their shares, or people holding them as security for a loan, or whatever.
posted by Joe in Australia at 7:57 PM on May 19 [1 favorite]


We need people like Soros to keep people like the Bank of England in check. England's monetary policy was delusional but they were unable to admit it until the free market made their mistakes undeniable.

I wish England hadn't given so much taxpayer money to Soros in an attempt to prop up their failing scheme, but that's not Soros' fault.

The real solution to this problem is to get competent people running the government. Until we manage that, we need events like this to remind us that our politicians suck and we should probably do something about it.
posted by foobaz at 8:14 PM on May 19 [3 favorites]


I miss Mutant.
posted by armage at 4:31 AM on May 20 [4 favorites]


If we had remained on the gold standard, this last recession would have resulted in Great Depression levels of unemployment.

I will never get the obsession with hard money.
posted by professor plum with a rope at 5:13 AM on May 20 [4 favorites]


The Prime Minister at the time, Margaret Thatcher, had long opposed entering the ERM, insisting that the price of the pound be set by the markets. By 1990, however, Thatcher lacked the political power to oppose other members of her Conservative party that wanted to fix their exchange rates with the rest of Europe.

Oh, Maggie. The only time you could have done the UK any good you lacked the iron will to do it. Iron Lady, indeed.

Regarding the main point of the article, it took Wall Street some time to figure out how to create the conditions so that a gambit could bring down the US economy. However, their gambit wasn't a bet so much as a self-fulfilling prophecy.
posted by Mental Wimp at 8:43 AM on May 20


this last recession would have resulted in Great Depression levels of unemployment. I will never get the obsession with hard money.

This is just an anecdote, but I've made the same basic remark on a number of occasions and a fair number of respondents concur with the Great Depression point -- and then say that it would be a good thing, because it would administer a necessary moral corrective to the unwashed masses.

Yeah.

Not because "the next bubble will be worse, so we need to pop it now" type of thing, but A Necessary Moral Corrective.

...not that there's anything racial about it, oh no, saints forefend. It's just the, y'know, Some People need to be taught a lesson. About their place.
posted by aramaic at 10:49 AM on May 20


I don't like the way the article describes it as a one way bet.
Plenty of people recognised the downside of the pound, but reasonably believed that the UK gov could defend it by raising rates if necessary.
That they did, and twice, without staving off the market was a feat of incredible luck/timing for Soros.
If he had not 'gone for the jugular' that day, the UK may well have been able to keep the pound in the ERM a bit longer through higher rates.
In any case, the reality was the British economy was heading the wrong way, and needed a lower pound, but it was not a foregone conclusion that the devaluation would happen, and other factors could have come into play over a longer period.
There are no sure bets, although being able to raise $10b helps.
posted by bystander at 9:37 PM on May 20 [1 favorite]


It was a fight between the city and westminster and the city won and we are now reaping what was sown: LIBOR/PPI/CDO.

This New Libor 'Scandal' Will Cause A Terrifying Financial Crisis
posted by homunculus at 6:01 PM on June 5 [1 favorite]


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