Nouriel Roubini writes: Last February – well before the collapse of Bear Stearns - I wrote a paper “The Risk of a Systemic Financial Meltdown: The 12 Steps to Financial Disaster”
where I outlined how the U.S financial crisis would become more severe
and virulent and eventually lead to a systemic financial meltdown and a
severe recession. …

Since February, step by step, we have
gotten very close now to this systemic financial meltdown, first in the
US and now also in Europe. Last week I suggested, among many other
policy options, the need for a coordinated monetary policy rate cut.
That cut arrived this morning with Fed, ECB and other central banks
cutting their policy rates by 50bps.

This action is necessary but only
cosmetic and it is too little too late. European central banks should
have cut rates – as I suggested – many months ago before the recession
and financial crisis became so virulent; and now 50bps for the Eurozone
is peanuts at the time when a minimum of 150bps is necessary to restart
the economy and unclog frozen financial markets. 50bps is also too
little in the US given the damage to the real economy of the financial
shocks of the last month; during the last recession the Fed cut the Fed
Funds down to 1%; we are still 50bps away from that level. But at the
end of this cycle – as I argued before – the Fed Funds will be closer
to 0% than to 1%.

Policy rate cuts will have limited effects as they don’t resolve the
fundamental problem in markets that is keeping money market spreads
relative to safe rates so high, i.e massive counterparty risk. To
resolve that triage of insolvent banks and recapitalization of solvent
banks, together with massive injections of liquidity in non banks and
the corporate sector are necessary; yesterday plan to support the
commercial paper market – something I recommended last week - is a step
in the right direction.

Other more radical additional policy actions are also needed now; here are four suggestions for such additional policy action. … (10/08/08)
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