My name and financial markets in turmoil have been associated once or twice in the past. Thankfully not on this occasion -- this time I'm on the outside looking in and only too happy to remain on the sidelines. The words turmoil and crisis very quickly became the buzzwords of the financial markets in 2007 and unfortunately this trend looks set to continue into long into 2008.

The problems at Northern Rock in England have exposed an issue that I know from first-hand experience has existed for many years. During my heyday at Barings, the Bank of England, not having sufficient understanding of the market allowed 10 times the legal limit of a bank's capital to be lent to a subsidiary.

The fact that this amount was also twice the entire capital base of the bank is only more damning. This lack of understanding still seems to permeate the market place.

The sub-prime problems that started in the US have become a worldwide issue and have led to growing concerns of a recession in the world's biggest economy.

Earlier this week, George Soros, the billionaire investor, was quoted as saying that the current world market situation is much more serious than any financial crisis since the end of World War II. The predominant fear is that of a recession in the US and what impact this may have around the globe.

The US has officially entered periods of recession four times since 1980 and has taken between six and nine months to recover from it.

This week started with the day which is dubbed 'Blue Monday' -- a day traditionally associated with psychological post-Christmas jitters, although this year it came in tandem with a slump in global markets.

While traders on Wall Street enjoyed the Martin Luther King Day bank holiday, the remaining global markets panicked and were rapidly sent into freefall.

With the FTSE down 5.5pc, the ISEQ a relatively modest 4pc lower and the French and German markets losing 6.8pc and 7pc respectively, the theory that the American markets sneeze and the rest of the global markets catch a cold was borne true yet again. The Nikkei 225 in Japan suffered its worst two-day loss in 18 years

On Tuesday morning, before the American markets opened, the Federal Reserve took the unprecedented step of cutting the interest rate by three quarters of 1pc -- eight days ahead of its scheduled monthly meeting.

Undoubtedly this was a knee-jerk reaction to a rapidly worsening situation but a necessary intervention all the same. By the end of the day, earlier losses had been largely recovered but the market still failed to regain the psychologically important 12,000 level.

Emotion

Emotion is having a disproportionate impact on the markets at the moment and is driving direction far more than rational, planned investment and thought.

A steady hand and strong direction is required but unfortunately the political and fiscal landscape in the US at the moment looks unable to serve up anyone able to do this.

George Bush, last week unveiling his tax and fiscal stimulus packages, tripped over his words, tried jokes that were totally inappropriate and stuttered and stammered his way through a prepared set of statements that were looking to calm the markets nerves.

But the reverse proved true. Rather than offer the assurance the market needs at the moment, his direction looks shaky and unsure. The American market is in a fragile state and rather than having to contend with a single threat to the global economy, the threat to economic stability is coming from several different directions.

All of these individually can significantly impact the market but together they can literally suck the life out of it.

This has meant that many investors are sitting on the sidelines with the markets relatively illiquid and volatility approaching all-time highs day after day. This is also dragging down consumer confidence. The trading range for the Dow Jones Industrial was over 700 points on Tuesday alone this week.

On the domestic front, as more than €3bn was wiped off the value of the ISEQ on Monday, new figures suggested that some 50,000 young people are either in or entering negative equity, meaning their home is worth less than their mortgage.

This data released at the beginning of the week also showed that average house prices in Dublin had plummeted by 10pc on last year, meaning that every price increase since 2006 had now been wiped off the market.

Anyone purchasing property since that date may well be experiencing the challenging spectre of negative equity that led to mass repossessions in Britain the late eighties.

The house price drop will very rapidly translate into cash-strapped homeowners focusing solely on keeping their heads above water financially and jettisoning any plans for unnecessary spending. As they reduce their consumer spending, the knock on effect for an economy reeling from repetitive blows from the financial markets could be significant.

Whilst the impact of negative equity only becomes an issue if someone needs to sell or can't keep up their mortgages, tens of thousands of people around the country will be rationalising their spending habits.

Pity those ill-advised people, eager to climb the property ladder that took advantage of 100pc+ mortgages. Negative equity was their starting point now they may face a situation that they have no chance of escaping.

As in the US, where confidence in the markets and those in a position to direct them is at an all time low, the situation in Ireland is far from ideal.

Repeated talk of an impending crisis has always been talked down by the government who prefer the term 'slowdown'. Ignoring endless warnings, the government has chosen to blame critics for 'talking down the economy' rather than position the economy as best it might.

Unfortunately this shows a lack of understanding that, unfortunately, is far too commonplace amongst the regulators of financial markets.

The knock-on effects of the sub-prime crisis in the US have still not run their course. The potential impact has never been totally understood.

Not understood by the banks, Merrill Lynch's Alpha Fund lost 37pc almost overnight last year because it's complex algorithms were wrong and certainly not understood among the many Central Banks that control the global economy.

Boom

The consumer spending boom is coming to an end but following several years of cheap and abundant credit, the real worry has to be about how many people are sitting on credit-card debt that looks increasingly foolish as forecasts worsen.

There is no doubt that we've had it too good for too long and had started to take the good times for granted.

Pension Funds in Ireland are estimated to have lost €9bn already this year and to have experienced total losses of €15bn since a stock market high in February last year.

The really worrying fact is that we probably have not seen the end of the carnage. It will likely still get a lot worse before it starts to get any better. The Irish market appears to be ridiculously cheap at the moment but it is impossible to see the catalyst that will inspire a rebound in the value of shares. That should worry everybody.

The focus now shifts to Davos, where the global economic leaders are meeting where the current market turmoil is sure to be high on the agenda of items to be discussed.

The markets require transparency and strong leadership. A crisis of confidence awaits if the direction of those leaders is not positive.

Cutting the interest rate may have stemmed the downward flow for now but this action in itself will fuel inflationary fears and we are sure to see higher energy costs, higher food costs and a higher cost of importing goods in 2008.

The current market correction has not necessarily run its course and I would very much believe that we are still in the eye of the storm, waiting for someone to lead us out of it.

Nick Leeson: Biography

Former currency trader Nick Leeson caused the biggest financial scandal of the century.

His actions caused the collapse of Barings Bank in 1995 and his role in its downfall became one of the most spectacular debacles in modern financial history. He then fled Singapore after realising he could no longer hide his trading losses of more than $1bn.

Leeson had already been racking up huge losses for over a year, but by the morning of February 23, 1995, the pressure had reached boiling point.

In a final effort to recover the losses, the Barings' trader had bet on the Nikkei index of leading Japanese shares to rise.

But his gamble didn't pay off. The Japanese stock market kept falling, leading to even bigger losses.

On that day, he had lost more than $50m by lunchtime and his boss wanted to meet him to discuss the sizeable hole emerging on Barings' balance sheet.

Leeson wrote in his autobiography 'Rogue Trader': "It was time to run". Leeson was released in 1999 after four-years in a Singapore prison.

He now lives in Ireland with his second wife Leona and three children. He was appointed general manager of Galway United FC in 2005 and chief executive during the 2007 season.

- Nick Leeson