The news on the US economy is grim indeed. Unfortunately, there is nothing to cheer about in other countries and regions either. China stands out with the most positive profile. However, the outlook is becoming cloudier, with leading indicators signalling weaker growth ahead. As for emerging countries, they will be unable to counterbalance weakness in the developed world. What is occurring is a synchronised slowdown of the global economy.

Inflation pressures have receded and commodity prices are heading lower. The crisis in the financial system in Europe and America is leading to spill-over effects in the real economy, particularly in the US. At the same time, in a globalised world economy, risk aversion and deleveraging is having an impact everywhere.

We are also experiencing a high degree of volatility, as governments take precipitate and often unexpected actions in the financial markets. Not surprisingly, investors' expectations and calculations are thrown into a spin by such interference. The market mechanism is being disrupted by heavy-handed intervention.

Left to itself, the market provides a solution. Risk is recalculated and assets are re-priced, reflecting new realities. Unfortunately, as a consequence, many financial institutions and hedge funds would go out of business. But according to the rules, that's exactly what should happen. It is the only way to obtain the efficiency gains of a market-based solution.

However, the cost of such an outcome is politically unacceptable because the financial and the real economy would experience a major slump. Inevitably, the government is prompted to intervene massively to prevent this from occurring. As a result, the severity of a recession may be reduced, but there are significant costs involved.

In the US, the cost to the public purse of bailing out so many failed banks can be substantial. A country already running a large fiscal deficit can ill afford a considerable widening of the gap. Concurrently, the borrowing is likely to increase the debt-to-GDP ratio to a level as high as those in Italy and Japan. The problem is that, unlike the other two countries, the US relies heavily on funding by foreigners.

Eventually, market prices may adjust to resolve the problem if an adequate funding flow is not forthcoming, possibly by a fall in the value of the dollar and a rise in interest rates. To pay down its external debt, the US would need to switch priorities from consumption to investment and exports. And there is always the possibility of relying on a rise in inflation to reduce the debt burden. But this is a dangerous strategy that can backfire and cause damage.

At present, given the possibility of contagion in the financial system, the issue of moral hazard has been placed firmly on the back burner. However, ignoring moral hazard is very damaging to the smooth running of the market mechanism. The issue has less to do with fairness and much more to do with efficiency.

If financial institutions are repeatedly rescued from failing, because of poor decisions they had made earlier, we end up with distorted market signals. The bankers will have every incentive to engage in excessive risk-taking in the next round of casino capitalism because they would expect, based on past experience, that losses will be picked up by the house.

To discourage excessive risk-taking the government may have to introduce loads of new regulations. Some of it may be useful and some of it may be onerous, preventing the market from working properly. In a laisser-faire system the government should apply a light touch. Experience shows that the invisible hand of the market works a lot better than the government's heavy hand.

In the US, the public's trust in government officials is at a low level. And this is understandable if you look at the evidence. Video clips of what Paulson and Bernanke said, before the crisis broke, are available on the Internet and make for comic viewing.

Meanwhile, some Wall-Street fat cats are hurting; much to people's delight. But, other corpulent felines, have already pocketed their gains, escaped relatively unscathed, and are quietly planning their next profitable move.

One non-Wall-Streeter who is doing very well out of the current crisis is, of course, Warren Buffett. He is regularly in the news, smiling like the Cheshire cat who got a big helping of cream. An astute investor with lots of cash, he is poised to pounce on more opportunities.

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