The financial markets were still poorly understood from the point view of established market theory due to the complexity, the renowned financier George Soros said here on Saturday.
Addressing the World Economic Forum, Soros warned that the established market theory of how markets functioned had “collapsed, ” despite efforts to limit more complex products after the crisis.
“The unfortunate fact is that the established theory has collapsed but we haven’t actually got a proper understanding of how financial markets operate,” said the billionaire financier.
“We have introduced synthetic instruments, invented derivatives where we don’t fully understand the effect they have,” he said.
In response to the crisis, Soros advised governments should implement “a delicate two-phase manoeuvre,” which was featured by injecting more credit into the economy in the first phase and steering the economy back to growth in the second.
“The first phase of the manoeuvre is pretty well complete, but the second phase we haven’t started yet,” he said.
Soros agreed that there is a possibility of credit bubble as a result of the injection of cheap money by central banks in the world.
“I think it should be possible to withdraw the additional credit as the economy gets going. But it hasn’t been done yet, and therefore there is a fear that this could result in a runaway inflation,” Soros said.
He warned that “if the economy gets momentum, and the money injected into the system gathers a momentum, interest rates will shoot up and arrest recovery.”
“So we are facing a period of go-stop which is far superior than no-go at all, ” he added