Billionaire investor George Soros offered a gloomy outlook for the US economy, stating that a depression is possible. Testifying at a US Lower House Oversight and Government Reform Committee hearing on Thursday, Soros predicted that not only will the US muddle through a deep recession, but that hedge funds will be decimated by the current financial crisis.
A deep recession is now inevitable and the possibility of a depression cannot be ruled out," Soros said in prepared testimony. Hedge funds will see their portfolios shrink between 50 and 75% Soros said, due to the fact that they were a part of the financial market bubble. The bubble, which saw the Dow reach 14,000 just over a year ago, has now burst, the billionaire investor added. Shortly after his testimony, the Dow dipped below 8,000, testing its lows. In addition, Soros urged government intervention to prevent the growth of asset bubbles in the future. These asset bubbles, which have manifested in both the tech bubble and the housing bubble earlier, often have wide-reaching effects on the economy. The collapse of the housing bubble has dragged on the economy and is cited as the source of much of the current financial turmoil. The wisdom of governments intervening to stop asset bubbles in order to prevent catastrophic collapses has been debated by economists for decades. Until now the agencies has taken a hands-off approach, an approach which some officials, including Minneapolis Federal Reserve President Gary Stern have suggested should be re-examined. In an October 21st hearing, the former budget director for the Clinton administration Alice Rivlin told the House Financial Services Committee that there should be some government role in deflating asset bubbles. Rivlin discussed the notion that the Federal Reserve should be responsible for popping asset bubbles, noting that the Fed is charged with a hefty responsibility and suggested allowing a new instrument for the Fed to use in identifying these asset excesses. "While it is not realistic to expect the Fed to pursue several objectives simultaneously with the one blunt instrument (the federal funds rate), we certainly need to be more creative about curbing asset bubbles," Rivlin said at the time. "Maybe we have to invent another instrument specifically aimed at slowing asset bubbles". "At a minimum, we could charge the Fed or some other entity with issuing warnings that some class of asset prices is getting out of line," she continued. "The entity so charged would need strong protection from political interference." Meanwhile, in his testimony Thursday, Soros said that while it is impossible to prevent the formation of these asset price excesses, they can be constricted to "tolerable bounds." Soros also called for reform in financial markets through a series of new instruments and products that should be used by regulators. These instruments should be a high priority of President-elect Barack Obama's administration, Soros said.