The process of deleveraging is causing many casualties among individuals, corporations and countries everywhere. Despite massive government intervention across the world, there will be many more victims before some measure of stability returns. Needless to say, recovery will be slow and difficult.

Examining the reasons why we are in the current mess will help in understanding what the future portends. We believe that it is incorrect and misleading to blame laissez-faire economics for the financial crisis and its consequences. Being an advocate of a market economy is not an ideological standpoint but is based on the efficiency gains that the market produces.

Certainly, the market is less than perfect. But those imperfections are well known and can be compensated for, by appropriate policies. Notable among them are the management of aggregate demand deficiency and the regulation of markets to ensure fairness and competition.

The current turmoil has little to do with market failure and a lot to do with policy decisions that distorted the functioning of the market. Most of the blame has to be borne by American officials, but others too have to share in the responsibility.

We have experienced at least a decade of generally easy monetary policy, credit expansion and bailouts by policymakers at the Federal Reserve and the US Treasury. It has been a deliberate attempt to provide ready liquidity to boost consumption and artificially inflate asset prices.

Easy credit led to rising home prices, inducing households to extract equity from their homes and go on a spending spree. Asians, and others, provided the goods, as well as the vendor financing to support American consumption. Wall Street produced fancy derivatives, loaded with risk, and peddled them around the world.

The shadow banking system of structured investment vehicles, private-equity firms and hedge funds grew enormously, right under the eyes of the regulators. Everybody was leveraged to the hilt, courtesy of the largesse of American policymakers. The increase in liquidity penetrated every corner of the world.

There were accomplices, of course, chief among them being Japan and China. Japan has been running an ultra-easy monetary policy for years, doggedly refraining from allowing market forces to restructure its economic inefficiencies. As for China, it has been happy to follow an export-led growth strategy, resulting in huge trade surpluses. Elsewhere, most central banks also tended towards an easy monetary policy.

All of them celebrated their skills in managing the economy, even as leveraging continued and the US housing bubble grew. Liquidity was plentiful, real interest rates fairly low, and credit spreads narrow. Risk managers and central bankers saw only blue skies and slapped each other on the back. Virtually the only official body that warned of trouble ahead was the Bank for International Settlements.

The mortgage-based derivatives that proved to be so toxic were rubber-stamped as acceptable for mass distribution to buyers around the world by credit-rating agencies that connived with the issuers of these securities. Fed chairmen Greenspan and Bernanke, with little evident knowledge of derivatives, praised their usefulness in managing and dispersing risk. Unfortunately, the reality is quite different. For an honest account of the world of derivatives, the reader is referred to the book by Satyajit Das: Traders, Guns and Money.

Many of the statistics on inflation and output released by the US government are considered to be biased and to misrepresent underlying trends, by many observers. The problem is that the official data often fails to match up with other evidence. Frankly, all governments have a motive to doctor numbers. For example, many analysts think that the recently-released data on third-quarter GDP growth in China is too high to be credible.

A worrying trend in the current crisis is for US government bodies to relax the rules on mark-to-market accounting. They want to replace it with what has been rightly called Alice-in-Wonderland accounting. In an environment that requires greater transparency, they want to introduce more opacity. And, what's next? Will they sanction optimistic lying by corporate executives?

The bailouts have increased the problem of moral hazard enormously. Policymakers have created even bigger mega-banks, like JP Morgan, that are much too big to fail. Are we going to see a symbiotic relationship between the banks and the state? What will be the role of regulators?

As we have said before, the creation of the bubble was fuelled by easy money policies and failure in regulating the shadow banking sector. The current correction in the economy and the financial system is the efficient market mechanism at work, deflating overinflated assets and bringing about adjustments to the imbalances.

And what is the government doing? Well it is seeking to prevent adjustments from taking place and trying to re-leverage a failed system. Essentially, it wants to reinvigorate the bubble economy. Policymakers seem to be blind to the fact that they may be creating even bigger problems in the future. Evidently, they have learnt nothing from their past errors.

Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com