My latest column for Project Syndicate has been just published and is reposted below. This column was written last week at the peak of the market turmoil and when the G7 had just announced its plan to avoid a systemic financial meltdown. So, how have things changed in a week since this column was written? On the positive side the G7, the EU and other economies have committed to do whatever is necessary (not allowing any systemically important bank to fail, recapitalizing banks with public capital, providing unlimited liquidity to the financial system, providing direct credit to the corporate sector, providing guarantees to most banks’ liabilities, and any other necessary policy action) to prevent a systemic financial meltdown; most of these actions are sensible and follow closely the ones that I suggested were necessary to prevent the meltdown that the financial system neared at the end of last week. Much more needs to be done including further monetary policy easing, a large fiscal stimulus program to boost demand at the time when private aggregate demand (consumption and investment) are sharply falling; and a plan to reduce the mortgage debt burden of millions of distressed households. But at least policy is going in the right direction and the probability of a systemic meltdown – that reached a peak a week ago – is now significantly lower.

But are we close to the end of the tunnel now? Not really for a number of reasons I will flesh out now…