The consolidation in Wall Street, and consequently in other stock markets worldwide, is the start of a necessary catharsis, says Donald Amstad, a fixed-income specialist and regional sales director at Aberdeen Asset Management Asia.

"The old global financial system was based on continuously rising asset prices for real estate, both commercial and residential, especially in the US,ö he says. ôThis was underpinned by copious amounts of leverage, derivatives and securitisation. And in turn by very low interest rates.ö

As long as house prices were going up, it seemed high-yielding products could be created that were risk-free, almost at will. This encouraged more issuance, more debt-driven demand and soon a parallel universe of structured investment vehicles (SIVs) and collateralised debt obligations (CDOs).

ôNow the boot's on the other foot: property losses are forcing deleveraging, with write-downs and bank losses on an equal, and epic, scale,ö he says.

Why the bubble was allowed to inflate for so long will be debated for years, Amstad says. One flaw was the imbalance between risk and reward. The dealmakers got paid because fees went up, which in turn drove profits that kept the shareholders onside.

But as the rescue of Fannie Mae and Freddie Mac, and Bear Stearns before them, shows, it's the taxpayer who suffers when things go wrong û an asymmetry that in effect means profits are privatised and losses socialised, he notes.

The problem now is that banks are in no position to lend, either to each other or into the real economy whose lifeblood is credit, Amstad says. To judge from Lehman Brothers' fall, the Treasury's stance may be hardening towards further bailouts, even as bank failure spreads from the US to Europe, accelerating the global slowdown.

Amstad is cautious about the timing of a recovery, noting housing needs to stabilise and confidence needs to return.

ôThere is no immediate prospect of the first because of over-supply. Besides, job losses are on the rise,ö he says. ôThe second requires transparency in the financial system, with an overhaul in the boardroom as well as in regulation.ö

There is good news, however, says Amstad. The inevitable deleveraging means that good quality assets will have to be jettisoned to pay for those gone bad, a process that will throw up bargains. The winners here will be those individuals, companies and countries that have nursed their savings and kept debt to a minimum.

"If the real distinction is between those who are highly leveraged and those who are less leveraged, then the established categories of developed and emerging economies no longer apply,ö he says. ôAsia should fare a lot better than the highly leveraged because, in the new era, cash is king.ö