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Financial chaos could lead to 'real crisis'

By Li Xiang (China Daily)
Updated: 2008-09-23 06:57

The current turmoil in the global financial market could lead to a real economic crisis in the near future, Klaus Schwab, president of the World Economic Forum, warned in Beijing on Monday.

"We will not only have a financial crisis, but also a significant slowdown of the global economy," Schwab said.

The damage to a vast amount of wealth and the massive loss of people's confidence will eventually hit consumer patterns, which could lead to a real crisis, he said.

Originating from Wall Street, the heart of global finance, the current chaos seems to have deepened amid the fear that a domino effect of failing banks could lead to an even gloomier situation - especially after the bankruptcy of global financial services firm Lehman Brothers, the largest of its kind seen in the United States.

Last week, the US government formally unveiled a staggering bailout plan of $700 billion to buy bad mortgage-related assets of private firms to help stabilize the market.

Central banks in Europe and Asia have also taken critical steps to ease the potential impact.

One fundamental cause of the current crisis is the lack of risk previously held among investors, Schwab said.

"People had lost their feeling for risk. They thought risks would never occur," Schwab said. "Risk has to be in some way incorporated into the price. But we didn't price in the risks anymore."

Without sounding overly pessimistic, Schwab said one consequence of the current crisis is that global cooperation will once again be tested.

"The question is whether we are capable, based on what we have learned, to sit together as a global community and to make sure that we have the regulatory system that is needed to respond to the extremely negative consequences of the crisis," he said.

Schwab, who left Beijing later Monday, will attend the Summer Davos global meeting in Tianjin, where he is scheduled to meet Premier Wen Jiabao, government officials and business leaders.