Business comment: Look to China for root causes of the crisis

This crisis has not fundamentally been about equity market valuations. The proximate cause of this crisis has been difficulties in the US sub-prime mortgage market. But although the story started there it didn't have to.

A week's break in the Med did not bring escape. No sooner had I arrived than, as news of market shenanigans reached us, some chap, recognising me from my photograph on this page (and that was a first!) pinned me to the edge of the swimming pool and asked me the fundamental question: "What on earth is going on?"

The first thing to say is that the gyrations of the equity market, although striking, are not extraordinary. This is the third significant global sell-off in equities since the beginning of 2006. After its recovery in the last couple of days, the FTSE 100 is now some 8pc below its July peak. But that means that it is pretty much back to where it was at the beginning of the year.

Yet this crisis has not fundamentally been about equity market valuations. True, some equity markets have looked toppy, especially the US. But the UK market has not appeared to be seriously over-valued. This puts this episode in stark contrast to the dotcom boom and bust and the equity market crash of 1987.

The proximate cause of this crisis has been difficulties in the US sub-prime mortgage market. But although the story started there it didn't have to.

It could easily have begun somewhere else. The saga which this episode set running is about the financial markets' wholesale embrace of risk at the prospect of little extra reward, and about the distribution of this risk around the system.

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