His bet broke the Bank in 1992 and, 15 years later, he predicted economic crisis before the credit crunch struck. What keeps George Soros ahead of the game? The speculator talks about financial meltdown, tougher regulation and why Barack Obama is listening

George Soros is back on his soapbox. Sixty-one years ago the teenaged illegal immigrant from Hungary spent much of his time between menial jobs in London restaurant kitchens by getting up at Speakers' Corner in Hyde Park and promoting—in Esperanto—the merits of internationalism. Today, Soros is the world's best-known speculator and billionaire investor and is once again giving forth. His message is still about the importance of international co-operation but now he is talking about the global financial crisis, and this time round people are actually taking note.

At 78, Soros has the ear of the new American president, he is recognised in financial markets as one of the few big players to have anticipated the depth of the economic meltdown and he is enjoying new respect and rising book sales for his pet theory of market behaviour, which he calls reflexivity.

"It is in a way a culminating point of my life's work," the New York-based financier says of this belated heyday during an interview at the large home he owns in Kensington, west London. "The American election, the financial crisis, the theory of reflexivity... it is actually a very stimulating period."

His credentials for advising Barack Obama, Gordon Brown and anyone else who will listen about how to undo the damage of this economic collapse and then prevent a similar crisis in the future are basically those of the poacher giving a few tips to gamekeepers. Since shifting from London to New York in 1956 and later setting up his own Wall Street hedge fund, Soros has thrived on detecting structural imperfections and temporary imbalances in the markets, pouncing with breathtaking confidence whenever he has seen an opening. The most famous example was when he "broke the Bank of England" with the 1992 bet against the pound that earned him $1.1bn. Soros says his attack on the pound, which forced Chancellor Norman Lamont to pull Britain out of the Exchange Rate Mechanism, was just one example of his constant search for the opportunities created by markets overshooting or undershooting instead of maintaining their supposed equilibrium.

"The authorities (in 1992) lagged, you see," he says with a shrug. "There is this reflexive cat-and-mouse game going on between markets and authorities all the time and I am more aware of it than perhaps most others, therefore I acted more decisively."

Rejecting the notion that prices are the efficient outcome of perfect knowledge, which he calls the "ideological excess (of) market fundamentalism", Soros insists that markets are anything but self-correcting. Instead, they are shaped by the biases and ignorance of market players and those biases can be self-fulfilling.

During the US housing bubble, for instance, the relentless series of double-digit rises in house prices changed the behaviour and perceptions of market players, who loosened lending practices and allowed the market to get more and more out of equilibrium.

Any doubts about his own powers of anticipation may have been answered by his performance since August 2007, when the first symptoms of the credit crunch were on the horizon. Soros was in semi-retirement and focusing on his philanthropy and writing when he decided that the world was facing its biggest financial crisis since the Depression. Resuming control of his Quantum investment fund, he repositioned it just in time for the storm that was about to hit. By the end of 2007 the Quantum Fund was up almost 32 per cent for the year, netting Soros profits of $2.9bn when most other financiers were struggling for survival.

In 2008, he increased his fortune by another $2bn, according to Forbes magazine, which lifted him up its rich list from being the 97th richest person in the world to a career-high 28th. Soros now believes that he can step back from a hands-on role at Quantum. "I have done what I can to preserve capital," he says with some understatement. "Going forward, I need to be less engaged." In any case, he adds, "I am more engaged in policy issues than ever before".

His worry when it comes to those policy issues is that the authorities may still be lagging. Without radical and ongoing changes to market regulation and packages to support at-risk economies "all hell will break loose," Soros says. "For instance, having put the financial system on artificial life support after the Lehman breakdown, that artificial life support then created problems for the periphery countries that were not able to give the same kind of credible guarantees" as the US and other wealthy nations.

"You now face the situation where a lot of loans are going to come due that cannot be rolled over, so unless the authorities get their act together and do something to prevent it there will be tremendous problems... in all the emerging markets. I am talking 2009, I am talking about right now."

He is pleased that governments have begun to create money both domestically and internationally by expanding the IMF's Special Drawing Rights scheme but says that the programme should be larger, running to trillions of dollars.

The only way to avoid global deflation and depression, according to Soros, is to first induce its opposite, inflation, and then carefully reduce it. Speculators and investors need to be pulled tightly into line along with banks and other financial players, he says. He concedes that many of his proposals, such as the co-ordination of macroeconomic policies between national governments and bringing in international regulatory regimes for banking and markets to oversee some of the wilder financial instruments, will be difficult to sell politically. But he claims there is reason for at least some hope because of a growing awareness of the depth of crisis.

"I am actually fairly optimistic because the problems are recognised and certainly the new team in America understands things pretty well the same way as I do, and I think Gordon Brown does and he is providing leadership. If you only respond to problems and don't foresee them and take preventive action then the problem always gets larger, and measures that would have worked are inadequate by that time. So the problem that I see is that some of the policymakers understand what needs to be done but what they are afraid of actually has to happen before action can be taken. And that is why we are liable to have still a number of crises."

While several governments are considering the creation of "bad banks" to hold the toxic assets of crippled commercial banks, Soros says more dramatic steps are needed because even banks that are relieved of their worst assets will still spend years restoring their balance sheets before resuming the sort of lending needed to stimulate recovery. For that reason he advocates a partial nationalisation scheme through the creation of "good banks" as well as "bad banks", even though diverting solid assets from existing commercial banks into such "good banks" would erode the wealth of shareholders in the existing banks. Too much has already been done for the banks and their shareholders rather than for the ordinary households and businesses that would benefit from new lending, he says.

Governments should keep existing capital with bad assets and move good assets into a new bank, which would then be recapitalised so it could provide new lending, says Soros. Advocating much greater curbs on the sort of short-selling of stocks that has been a mainstay of the hedge fund industry, he says the creation of new credit instruments will have to be regulated in the future.

While many are now calling for regulation of credit default swaps, Soros takes a harder line, saying they are toxic and should be used only by prescription. They could be used to insure actual bonds, he says, but not to speculate against nations or businesses. Derivatives and synthetic instruments such as the slicing and dicing of collateralised debt obligations should, he says, also be tightly regulated and monitored.
The limits on credit and leverage will have to be set much lower than those that were tolerated in the past. It is a move that would make the financial industry less profitable than it has been in recent years and render some highly leveraged business models untenable.

One potential engine for new growth is alternative energies and a greener economy, but Soros worries that the fall in oil prices has killed a grand opportunity by reducing the incentive to invest in greener energy. "It would have been a perfect fit—you could have introduced effectively a carbon tax and you could have put a floor under (the price of) oil, and stopped it from falling but now that it has fallen you would have to impose an import duty to raise it."

That is politically untenable, he concedes, but at current prices "you have to use less simple instruments to foster alternative energy development, like subsidies and so on. It will be messier."

It will be at least a decade before the US sees robust growth, he says, and one important consequence will be a new wariness in China about the US economic model. "The Chinese used to look up to the West and try to imitate the West. They have now discovered that it may not be the right thing to imitate, when they see it collapse and they say 'maybe we shouldn't go that route', so they actually now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.

"For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the last year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing." In any case, Beijing can no longer be relied on to keep ploughing money into US government debt, he warns. "They will have less money to spend because their surplus is shrinking."

Soros has donated more than $5bn to support the development of open politics and civil society, mainly by promoting non-violent democratic change from eastern Europe to East Timor, and now gives away about $500m a year. But until now, he's not enjoyed much clout in Washington. He had little influence on Bill Clinton's administration and was a political outcast under George W Bush, having spent $25m trying to help John Kerry defeat Bush in 2004. Things are different today.

Some Wall Street donors climbed on to Obama's bandwagon just before last November's election, when he was comfortably leading John McCain in the polls. Others can boast that they backed the future president before he stitched up the Democratic nomination in May and a few can even say that they supported him before he won the Iowa Democratic caucuses in January. Soros held a fundraiser for Obama at his New York home and donated the maximum legal amount in 2004, when Obama had not even been elected to the US Senate. As early as 2006 he was urging him to run for president, and when he did become a candidate, Soros organised for Obama to meet other financiers in his Wall Street office.

Soros now says that for the first time in his life he is confident that when he expresses his policy views "at least I will get a hearing" in Washington. That is a long way indeed from talking Esperanto to a few bewildered people at Speakers' Corner.