'Current crisis caused by 9/11'

This is the view of Canadian economist Stephen Poloz, senior vice president of financing for Export Development Canada (EDC).

EDC is an organisation aimed at stimulating trade between South Africa and Canada. In 2007, there was approximately US$1.5bn in trade between the two countries and this figure is expected to continue to rise.

"9/11 was the real beginning of this financial crisis, and we need to understand the series of events that have led up to today," said Poloz.

The events of September 2001 brought on a fundamental shift in the mindset of the US consumer and, eventually, financial institutions serving these consumers, said Poloz.

"During these times of uncertainty, US consumers were no longer interested in saving. Instead, they wanted to spend every cent they earned, as well as any credit they could get access to."

And US consumers wanted housing, irrespective of whether they earned an income or could afford the repayments on a house of their own.

With house prices consistently rising, US financial institutions began to offer "sub-prime" mortgages to consumers who would not normally qualify for credit advances. These lenders were betting that house prices would continue to rise and homeowners would be able to recapitalise their mortgages against these price rises.

Unfortunately, a slowing global economy put paid to these structures and the subsequent meltdown in the sub-prime market as well as the decrease in available credit in the market led to a huge breakdown in global financial markets.

De-coupling theory

Poloz believes the events of the last few days have put paid to the "de-coupling theory".

The assumption by many economists, last year had been that the rest of the global economy would continue ticking along despite problems in the US housing market.

Market commentators expected the world to carry on sustained by rapid growth in Chinese, Indian, Russian and South American markets.

Poloz believes that two scenarios could play out in the US which will decide the pace of the global economic recovery.

"As an economist I will tell you that the US recovery is likely to be slow in 2009, but likely to pick up the pace in 2010, which will likely pull other economies along."

However, from a business and social economic perspective, Poloz thinks that there is an alternative scenario which bears some consideration.

He believes that the US consumers, who have traditionally had a negative savings rate, will begin to realise that they don't hold sufficient savings and equity in their properties and in hard cash.

This will lead to a mind-shift that will see Americans increase their focus on savings. "I think we are then going to see some balance sheet rebuilding over the next five years, even if there is not much growth."

- Fin24.com