When George Soros says that the world is facing its worst financial crisis since the second world war, businessmen, politicians and the public pay attention. This, after all, is the man who famously made $1 billion betting against the pound in 1992.

The 77-year-old investor issued his dire warning at the World Economic Forum in Davos last week amid increasing volatility in the world financial markets, but before the huge losses at Société Générale had become public.

“The current crisis is not only the bust that follows the housing boom,” he said. “It’s basically the end of a 60-year period of continuing credit expansion.”

Now the party is grinding to a halt and the hangover will be a humdinger. “Credit expansion must now be followed by a period of contraction,” he claimed. “A recession in the developed world is now more or less inevitable.” The effect was likely to be contagious and infect the whole globe. It was, he concluded, the “end of an era”.

So is the world poised on the edge of an abyss? Or is Soros too gloomy by half?

Not everyone believes that pain for the financial suits inevitably spells trouble for the wider world.

“Purely from the point of view of the financial markets, there is probably more turbulence on a wider scale than ever before,” said Professor Willem Buiter of the London School of Economics and a former member of the Bank of England’s monetary policy committee.

“But you should not listen only to the anguish and pain of Wall Street. They are getting hammered. They are one of two sectors in the US that have expanded beyond sustainable levels: the financial sector and the housing sector. Both have to contract.

“But it is not yet Main Street. I don’t expect anything catastrophic.” There is still a chance, he believes, that the US will escape recession.

Others point out that western economies have weathered previous financial crises with remarkable resilience. “In 1987 on Black Monday stock markets fell about 20%,” said Gabriel Stein, a director of Lombard Street Research, a leading economic consultancy. “So [the present turmoil] is certainly not the biggest stock market fall. Looking back, we now know that 1987 was the buying opportunity of a lifetime.”

Though Stein agrees there are serious problems, especially in banking systems and credit markets, he remains sanguine about the ability of free economies to adjust and recover. They did so after the American savings and loan crisis of the 1980s, the Asian financial crisis of 1997-99 and the bursting of the dotcom bubble in 2000.

“George Soros is very much given to exaggeration. There will be problems. [But] the world economy will survive,” Stein said.

Other experts may not entirely buy the Soros vision, but they do increasingly believe that the US and UK economies are heading into storms.

“There’s a very high risk of recession in the UK and in the US, and the eurozone will see a sharp slowdown later this year,” warned David Owen, chief European economist at Dresdner Kleinwort bank. The big danger in the UK is the housing market. Experience shows that downturns in housing markets tend to last for years, he said, and the latest figures show mortgage approvals in Britain are down 40% on a year ago.

The stock markets are already in a volatile state. One day share prices plummet on fears of further financial woes and wider recession. The next they soar on the back of lower interest rates and hopes of escape. The reality is nobody is sure how bad things are.

“A lot depends on how serious the problems in the financial sector are,” said Roger Bootle, economic adviser to Deloitte. “Heaven knows what else is going to crawl out of the woodwork.

“It’s not just going to be confined to sub-prime mortgages. It’s going to be prime mortgages, nonmortgages, consumer debt, commercial property lending, corporate debt . . . people are going to be surprised.

“But that’s what happens when you get the unwinding of a massive asset boom simultaneously with a slowing economy.”

This unwinding of the financial boom will hit ordinary consumers, he says. The economy will slow and unemployment will rise. “But it will be modest - a couple of hundred thousand maybe - compared with what we have seen in the past.”

While individuals will feel the squeeze, greater shifts will take place on a global level. Through the turmoil, relative wealth and power are moving from West to East. “The crisis accelerates the shift in economic weight and power to the Gulf and to the East,” said Buiter. “The new moneybags, the sovereign wealth funds and others in the Far East and the Gulf are going to buy up large chunks of prime assets in the West.

“It will undoubtedly be accompanied by a shift in political and diplomatic power. The US will never again be what it was in 2000, or what it felt it was.”

So in that sense, maybe it is the end of an era.

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