Feb. 23 (Bloomberg) -- Billionaire investor George Soros said the current economic upheaval has its roots in the financial deregulation of the 1980s and signals the end of a free-market model that has since dominated capitalist countries.

Liberalization of the financial industry begun by the Reagan administration has led to a series of crises forcing government intervention, Soros told economists and bankers at a Feb. 20 private dinner at Columbia University in New York. The global recession, triggered by the collapse of the U.S. housing market, has “damaged the financial system itself,” he said.

Regulators are in part to blame because they “abrogated” their responsibilities, Soros, 78, said. The philosophy of “market fundamentalism” was now under question as financial markets have proved to be inefficient and affected by biases rather than driven by all the available information, he said.

“We’re in a crisis, I think, that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,” Soros said, adding that the Federal Reserve had created several by lowering interest rates.

Soros, founder of New York-based hedge-fund firm Soros Fund Management LLC, said last month at the World Economic Forum in Davos, Switzerland, that the Obama administration’s plan to buy toxic assets from U.S. banks won’t be enough to get financial institutions to start lending again.

A more effective approach for restarting the economy would be to inject capital directly into the banks and cut minimum capital requirements, Soros said.

Subprime ‘Detonator’

The September collapse of Lehman Brothers Holdings Inc. was the point at which the Wall Street crisis spilled into the real economy, said Soros, whose firm oversees $21 billion.

“The economy went into freefall and is still falling and we don’t know where the bottom will be until we get there and there’s no sign that we are anywhere near a bottom,” he said.

The scale of the problem is more than in the Great Depression because of the leverage involved. The ratio of debt to gross domestic product has increased from 160 percent in the 1920s to 350 percent last year, and is set to rise to 500 percent, he said.

The real estate bubble was created as much by “relaxed” lending standards and the valuation of collateral as the availability of credit, he said. The bubble began in the early 1980s, and the subprime-mortgage debacle acted as the “detonator,” Soros said. The crisis was made possible by the globalization of financial markets and securitization of debt, he said.

Risk management has become so “refined and sophisticated” regulators can no longer follow what is happening, he said.

Political Contributions

Hungarian-born Soros gained fame more than 16 years ago when he broke the Bank of England’s defense of the pound and drove the currency from Europe’s system of linked exchange rates. Other successful trades included bets that Germany’s mark would rise after the collapse of the Berlin Wall and Japanese stocks would start to tumble in 1989.

Soros gave $23.7 million to independent political committees opposing then-President George W. Bush’s re-election in 2004, more than any other donor, according to the Center for Responsive Politics, a Washington-based research group. Soros and his family donated $200,000 to the committee that organized President Barack Obama’s inauguration last month.

Soros’s Quantum Endowment Fund returned 8 percent last year. That compared with an average loss of 18 percent by hedge funds, according to data compiled by Hedge Fund Research Inc. of Chicago.

To contact the reporter on this story: Walid el-Gabry in New York at welgabry@bloomberg.net

Last Updated: February 23, 2009 12:10 EST