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George Soros, the hedge-fund king, has sharply criticised US Treasury Secretary Hank Paulson for always reacting behind the curve in his handling of that country's financial crisis, which is bringing the era of American consumption to an end.

In an interview with Bill Moyers broadcast on PBS last week, Soros said he had a negative view of Paulson's performance.

"He represents the very kind of financial engineering that has gotten us into this trouble. And this buying off the noxious things was [his idea].

"Before that, he wanted to create a super SIV - special investment vehicle - to take care of the other special investment vehicles. That didn't fly. And they are now within a week of recognising that they have to change and inject money into the banks to make up for the hole in the equity, because those banks lost money. And they can't make it up by taking assets off their hands. You have to recognise the losses and replenish the equity."

Indeed, Paulson's strategy backfired when he attempted to persuade the US Congress to go along with his hard-sell US$700-billion (Bt24 trillion) package to buy out the bad debts of the financial institutions. Paulson, former head of investment bank Goldman Sachs, argued the banks would resume lending again because their bad debts would be taken off of their books. He said by failing to accept the package, the US would risk sliding into the worst recession since the Great Depression of the 1930s.

But the financial markets did not buy Paulson's rescue package as adequate. There was a panicked sell-off of equities worldwide the previous week. The US market alone has so far lost about $8.5 trillion in market capitalisation. It is not certain whether Paulson initially had a hidden agenda to protect the interests of the shareholders of the US banks, but he has changed track by planning to use part of the $700 billion package to increase the capital of the banks. It is unclear how the US government will intervene in the US banks with fresh capital from taxpayers' money and simultaneously excise their bad debts.

Soros said the government's money had to build up the capital of the banks so that the capital equity could sustain at least 12 times the amount of lending.

"So that's an obvious thing. And every economist agrees with this," he said.

"The bank examiners know how those banks stand, and they can say how much capital they need. They could raise that capital from the private market, or they could turn to this new organisation and get the money from there.

That would dilute the shareholdings; it would hurt the shareholders, which I think Paulson wanted to avoid. He didn't want to go there. But it has to be done.

"But then, the shareholders could be offered the right to provide the new capital. If they provide the new capital, then there's no dilution, and the rights could be traded. So if they don't have the money, other people - the private sector - could put in the money. And if the private sector is not willing to do it, then the government does it."

If Paulson had pre-empted the crisis by introducing the painful measures to deal with the financial system earlier this year when Bear Stearns went under, he could have alleviated the depth of the US and global financial meltdown. But he assured the financial markets that the turmoil, manifest since August 2007 with the collapse of the sub-prime loan market, could be brought under control. Now it is more difficult to curtail the crisis from spreading around the globe, with Europe also teetering on the brink of collapse.

Soros said the US government also needed to deal with the mortgage problem by reducing foreclosures at the same time it was recapitalising the banks.

He said the era of American consumption had come to an end.

Americans had been living beyond their means, as was obvious from the current-account deficit of 5-6 per cent a year. They had been consuming far more than their ability to invest or produce. As a result, the US national debt has reached $10 trillion. However, American consumption has been the locomotive of global growth.

"For the past 25 years, the motor driving the world economy has been consumption by the American consumer, who has been spending more than he has been saving, more than he's been producing. So that motor is now switched off. It's finished. It's run out and can't continue.

"You need a new motor. And we have a big problem: global warming. It will require big investment. And this could be the motor of the world economy in the years to come."

Soros has put his new vision of the world in the post-American-consumption era in a timely book: "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means".