JUDY WOODRUFF: How do you assess the strength of the financial system today?
GEORGE SOROS: I think this is the most serious crisis of our lifetime. It’s not just a housing crisis, but a crisis of the financial system.
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GEORGE SOROS: The regulators have failed to regulate, and they really have to — they left it to the market. That was this market fundamentalist philosophy, that markets will take care of themselves.
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And I contend that there’s been what I call a super bubble that has been growing over the last 25 years at least, which basically consisted of an extension in credit, increasing use of leverage. That was the trend in reality.

And the misconception that credit is that markets can be left to their own devices. Now, in fact, they are given to excesses, and occasionally they create crises, but each time the authorities intervene and bail out the failing institutions, provide fiscal stimulus, monetary stimulus.

So it seems like the market corrects itself, but it’s actually the intervention of the authorities that saves the market.

Officials at the Federal Deposit Insurance Corp. yesterday detailed a plan to prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans.
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Agency officials estimated the cost to the government at $22.4 billion.
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The mortgage industry is concerned that any new modification plan will persuade some people to stop making mortgage payments in addition to helping people who already have stopped making payments. The industry argues this will translate into higher interest rates because investors will demand compensation for the increased risk of loan defaults. That, in turn, would limit the number of people who can afford mortgage loans.
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FDIC estimates that 1.4 million borrowers with such loans are at least two months late on their payments, and another 3 million borrowers will miss at least two payments by the end of next year. The agency estimates that half those borrowers, or about 2.2 million people, would receive a loan modification under the program, and that about 1.5 million will successfully avoid foreclosure.

Under the terms of the proposed FDIC program, lenders would reduce monthly payments primarily by cutting the borrower’s interest rate to a minimum rate of 3 percent. If necessary, the company could also extend the repayment period on the loan beyond 30 years, reducing each monthly payment. Finally, in some cases, companies could defer repayment of some principal. The borrower still would be on the hook for the full value of the loan.

Officials said their experience at IndyMac showed that principal reductions were not necessary. So far, FDIC has modified about 20,000 IndyMac loans. In 70 percent of the cases, FDIC was able to create an affordable payment solely by reducing the interest rate. In 21 percent of the cases, the agency also extended the life of the loan. In 9 percent of the cases, it delayed repayment of some principal.

The U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever, according to economists surveyed by Bloomberg News.

The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11. Following last quarter’s 0.3 percent drop, the slump would be the longest since 1974-75.
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Falling demand will cause an even bigger increase in unemployment than projected last month. Economists surveyed forecast the jobless rate will rise to 7 percent in the first quarter of 2009, up from last month’s forecast of 6.6 percent. The rate will climb to 7.7 percent by the end of 2009, the highest level since 1992, the survey showed.

The jobless rate rose to 6.5 percent in October, the highest since 1994

With personal finance I still believe the same smart personal financial decisions last year, or five years ago are wise today: avoid credit card debt, have an emergency fund of 6 months of expenses, save for retirement, have proper health insurance, don’t buy what you don’t need and can’t afford… The biggest change I see is that the risks of failing to do these things (and the risks of failing to have done them in the past) are increasing greatly.

One of the challenges with personal financial matters is they are by nature long term issues. What you did over the last 5 years cannot be fixed in a few weeks, most likely it takes years.

Treasury Secretary Henry Paulson said Wednesday that the government would broaden the reach of its $700 billion bailout plan to support non-bank financial institutions that provide consumer credit, such as credit cards and auto loans.
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“Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”

The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.
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Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.
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Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual’s credit-card portfolio is subprime, according to Innovest.

NYT: there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?
Dr. Galbraith: Ten or 12 would be closer than two or three.

NYT: What does that say about the field of economics, which claims to be a science?
Dr. Galbraith: It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

NYT: You’re referring to the Washington-based conservative philosophy that rejects government regulation in favor of free-market worship?
Dr. Galbraith: Reagan’s economists worshiped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.

First, the U.S. has an unparalleled environment for entrepreneurship and starting new companies.

Second, U.S. entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world. While other countries increase their spending on research and development, the U.S. remains uniquely good at coaxing innovation out of its research and translating those innovations into commercial products.
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Third, the U.S. has the world’s best institutions for higher learning, and they are getting stronger. They equip students with highly advanced skills and act as magnets for global talent, while playing a critical role in innovation and spinning off new businesses.

Fourth, America has been the country with the strongest commitment to competition and free markets.
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An inadequate rate of reinvestment in science and technology is hampering America’s feeder system for entrepreneurship. Research and development as a share of GDP has actually declined, while it has risen in many other countries.
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A creeping relaxation of antitrust enforcement has allowed mergers to dominate markets. Ironically, these mergers are often justified by “free market” rhetoric. The U.S. is seeing more intervention in competition, with protectionism and favoritism on the rise. Few Americans know that the U.S. ranks only 20th among countries in openness to capital flows, 21st on low trade barriers, and 35th on absence of distortions from taxes and subsidies

he joins as many as 10,000 corrupt Chinese officials who have fled the country over the past decade, taking as much as $100 billion of public funds with them, according to an estimate by Li Chengyan, head of Peking University’s Anticorruption Research Institute.

More unexpected, however, was the heavy press coverage that Yang’s walkabout attracted in a country where the government is generally reluctant to wash its dirty linens in public. That suggests that “the government is sending a signal” that it regards “the number of officials fleeing as a very important problem which needs to be solved,” says Mao Zhaohui, director of anticorruption studies at Beijing’s Renmin University.

Corruption is pervasive at almost every level of the government, and it is a major factor eroding faith in the ruling Communist Party. Earlier this year, after thousands of schoolchildren died in the Sichuan earthquake, the Internet was ablaze with accusations that local officials had taken bribes to approve substandard materials for school construction.

Chinese President Hu Jintao has repeatedly declared that the fight against fraud is a top government priority and courts have handed down heavy sentences against prominent offenders. Last year, the former head of the Chinese Food and Drug Administration, Zheng Xiaoyu, was executed after being found guilty of taking bribes to approve thousands of new drugs.