Drew Hillier talks to George Soros about the Credit Crisis of 2008 and beyond.

The billionaire investment guru and hedge fund manager, George Soros, has a remarkable reputation, and - in many minds - a controversial one, for positioning himself on the right side in a crisis. No greater was this sentiment exemplified, and certainly no more firmly welded inexorably into the public consciousness, than on the infamous Black Wednesday of 1992, when Soros was said to have broken the Bank of England – reportedly borrowing sterling to the tune of £6.5bn, converting it into a mixture of deutschmarks and French francs before unwinding his positions, paying back his original borrowings and walking away with a healthy profit of around £1bn. Since those heady days, Soros has gone on to become not just one of the planet’s wealthiest individuals, (just last year his $17 billion investment fund grew by thirty-four per cent by betting that the credit crunch was more serious than most people expected) but also one of its leading liberal-leaning philanthropists and commentators.

The almost Messianic notoriety of George Soros, (merely the mention of his name tends to gain people’s attention) which lends him the air of some sort of latter-day prophet, sees him being sought out by individuals and organisations alike – not least from the global media – keen to sit at his feet and soak up the resultant words of wisdom. Even so, the 77-year-old Hungarian-born speculator can be a tetchy individual, and certainly makes no disguise of not suffering fools – gladly or otherwise! With a tendency to communicate in a sometimes exasperated tone, thickened by the accent of his country of origin, Soros can cut a pretty scary presence. Arguably therefore, his writings – of which, to date, run to a dozen or so tomes ranging from global capitalization to the economic and social consequence of Bush’s war on terror, provide us with a more widely accessible insight into, unquestionably, one of the most influential thinkers alive today.

Not one to miss an opportunity, his latest book is a timely work. In The Credit Crisis of 2008 and What it Means, Soros sets out his theory of what’s gone wrong. I caught up with him recently at the London School of Economics, where – on the latest leg of his book tour – he delivered a lecture on the New Paradigm for Financial Markets, which included his verdict on present woes. As has been widely reported, Soros believes this to be the most severe economic slump since the 1930s, marking the end of a twenty-five-year "era of credit expansion based on the dollar as the international reserve currency".

The Great Depression involved vast numbers of unemployed across the industrialised world, and real hunger in parts, especially the American mid-west. I started by asking if we are really contemplating anything ofthat magnitude now?

“Hopefully not, Mr Hillier. But the financial institutions have been severely damaged so that we are, currently, in a situation that I think will inevitably result in recession, certainly in the United States, and most likely in the United Kingdom also.”

 In warning that Britain has yet to suffer the worst of the fallout, Soros outlined his view that “basically, we have built this very powerful global financial system on a false premise – an ideology, if you like – namely, that a market tends to equilibrium in which deviations are random, and you can leave it to the markets to correct their own excesses. But that’s not true. It’s really not the way they work at all. So the book tries to explain how the concept of reflexivity – the bias perceptions of the participants – actually affect the fundamentals which markets are supposed to reflect. Markets do of course go to extremes and create bubbles, which is what I try to explain.”

When you say ‘create bubbles’, the West has enjoyed pretty good market conditions for something like a quarter of a century or so, which sounds a bit more surely than just a bubble?

“Well, no. I talk about that as a ‘super bubble.’ During this time – certainly the past twenty-five years – we’ve had a prolonged period of credit expansion and a belief that our markets can be left to their own devices. It’s what I call market fundamentalism. But because markets do go to extremes, we’ve seen a number of financial difficulties where, each time, the authorities – central banks and so forth – have intervened and bailed out a failing institution and stimulated the economy so that we got off pretty well without too much disruption. Therefore, we came to believe that markets could be left to sort themselves out, which clearly is not the case.”

So, if we’re witnessing the popping of a super bubble, how loud – and indeed how painful – will the pop be?

“Well that really depends on how the authorities respond. After all, the point I’m trying to make is there’s a lot more uncertainty in financial affairs than we care to recognise. And not only that, but the degree of uncertainty is also uncertain. As you pointed out, for the last fifty or sixty years we’ve had a pretty stable situation, but I think we’re entering a period of much greater instability. We’ve now have the threat of recession, and at the same time, the threat of inflation.”

Does that mean if anybody tells us to ‘settle down, we’re through the worst of it’, you would say that’s nonsense?

“Ha, well, we’ve had a pretty serious crunch – and though the acute phase is behind us, we’ve yet to feel the full effects. In the case of the United Kingdom, you’ve had a housing bubble that in terms of price increases has been greater than in the United States. That, now, is also going to be corrected – albeit taking longer than in the U.S. – because you haven’t had overbuilding. But actually, UK households are more indebted and the cost of houses in relation to earning is much higher than anyway else in the world. Furthermore, banks are no longer willing to lend as freely as they once did.”

As you say, there’s a great deal of uncertainly ahead. But if the correction is not too painful, then won’t most of us merely say bring back the bubble?

“That’s right. Except I don’t think you’re going to see that bubble coming back for quite some time. I think we have a number of years of very different market conditions than those we have been used to, certainly for the past twenty-five.”

Finally mister Soros, if we could turn briefly to the sharp rise in global oil prices, and how that impacts on further economic troubles?

“Of course. Though I don’t profess to be an expert in this area, without question, the rises in oil prices - which have what I call a ``parabolic shape,'' characteristic of bubbles - aggravate the prospects for a recession. The oil bubble will not burst until the U.S. and Britain are both in recession, at which time oil prices may drop dramatically. In other words, only when a recession is well and truly in place is a decline in consumption likely to outweigh the other factors."

You’re soon to appear before the U.S. Senate Commerce Committee, probing the underlying reasons of current oil price hikes. You’ve already pointed a figure at speculators as the key cause of the soaring price of crude. Looking at what appears to be a pretty gloomy picture going forward, exacerbated by large institutional investors pouring billions of dollars into commodity index funds reminiscent of a craze that led to the stock market crash of 1987, will this be the message you deliver to lawmakers on Capitol Hill?

"Yes. In both cases, the institutions are piling in on one side of the market, and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit, as they did in eight-seven, there would be a crash."

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means, by George Soros, is available online.