Soros surmises a 1970s-style recession

The words of George Soros, the great hedge fund magnate, have been etched onto the heart and mind of every banker. This was not only because the world economy has long been ripe for a healthy slowdown, but also because Soros has had a habit of getting most of his surmises correct.

He is by no means in the shoes of George W. Bush, or of the Israeli President. Fearful utterances have been heard from those leaders about a possible nuclear attack on Iran. Such an eventuality would send an already high oil price towards the stratosphere; the $250 target of Gasprom would be reached. The stagflation of the 1970s or perhaps worse would again raise its head.

In recent months, there has been a whole flood of faulty analytical advice reaching the market; in particular mathematical forecasting has suffered an enormous fall in prestige. Mathematics does not help us to discover when the whole crowd heads for the exit. The present downturn has brought into focus a rethinking on what should be the right education for those who lead the world's bank. The top man of the famous Saxo Bank has said he believes there were too many lawyers and accountants and too few economists leading the world banking system.

The learning of a finance man must be great and varied, and it includes the practice of a significant amount of philanthropy. Capitalism must present a human face, and seek the trust and affection of the masses. The public is obviously reasoning that if the great international banks cannot trust each other because of off-balance sheet risks, neither can the common people trust them. In the recent past, foolish Basel regulations allowed banks to omit trading risks from their balance sheets. These included funny repacked subprime loans, which could not be foreclosed.

A bank balance sheet is supposed to be like all balance sheets - a declaration of the company's position on a certain date.

The recession of the 1970s was sparked off when the Shah of Iran increased the price of oil fivefold after the 1973 Yom Kippur War. The world's stock exchanges did not deliver a penny of profit for a whole decade. In spite of all this, there were those who made money. The Seventies saw the dramatic rise in the price of gold and silver. Gold increased from $32 an ounce to over $800. Silver went up from single digits to $50 an ounce.

I am monitoring the behaviour of gold and silver shares and particularly like the commodity companies of the Hambros family, not least because I enjoyed an enlightening conversation with Gilbert Chalk on the mature of booms and busts in the very boardroom of Jocelyn Hambro. Chalk was the banker who set up, on Jocelyn's entrepreneurial decision, and my local promotion, the Malta Development Fund, the most profitable financial organisation ever to bear a Maltese name.

Chalk and I were looking out of Jocelyn's office on a dark London autumn evening. The office was right over the Tower of London, with an unbroken magnificent view of the distant Canary Wharf, where a search light was flashing from its top office tower. I asked Chalk jokingly: "Did you bankers lend money to the promoter of Canary Wharf without ever looking at his balance sheet?" Chalk answered: "Yes, that is what happens in bull market."

Chalk's answer can be applied to the present subprime crisis. Bank balance sheets must again reflect reality and not the hubris of bankers.

The emphasis of Soros's words was on the Hubris element. Alan Greenspan did not make his mistake in not regulating more carefully the mortgage market because he lacked financial expertise. He wanted possibly to satisfy the hubris of the Wall Street fraternity. He stated after all that the biggest cause of the present trouble was human nature.

Mr Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P.

johnazzopardivella@hotmail.com