http://www.rgemonitor.com/roubini-m..._policy_recommendations_to_avoid_the_meltdown ...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 ¡V 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: - To reduce the counterparty risk in the money markets a triage between insolvent banks that need to be shut down and a recapitalization of solvent banks is necessary together with massive injections of liquidity in non-banks and the corporate sector. Yesterday¡¦s plan to support the commercial paper market ¡V something I recommended last week - is a step in the right direction. Direct lending by the government to small businesses ¡V via the Small Business Administration ¡V is also necessary to avoid the implosion of smaller businesses. - a generalized temporary blanket guarantee of all deposits is now necessary both in the US and in Europe followed by a triage between insolvent banks to be closed rapidly and illiquid but solvent banks that deserve to be rescued to avoid the moral hazard of such blanket guarantee; - the flawed $700 bn TARP legislation will have to be modified in three ways to: a) allow for direct government injection of public capital in banks in the form of preferred shared matched by private capital contributions by current shareholders (via suspension of all dividend payments and matching Tier 1 capital provided by private shareholders); b) implement a clear plan to reduce the face value of mortgages for distressed home owners and avoid a tsunami of foreclosures; c) do a rapid and radical triage between solvent banks and insolvent banks that need to be rapidly closed. - given the collapse of private aggregate demand (consumption is falling, residential investment is falling, non-residential investment in structures is falling, capex spending by the corporate sector was falling already before the latest financial and confidence shock and will now be plunging at an even faster rate) you need to give a boost to aggregate demand to ensure that an unavoidable two-year recession does not become a decade long stagnation. Since the private sector is not spending and since the first fiscal stimulus plan (tax rebates for households and tax incentives to firms) miserably failed as households and firms are saving rather than spending and investing it is necessary now to boost directly public consumption of goods and services via a massive spending program (a $300 bn fiscal stimulus): the federal government should have a plan to immediately spend in infrastructures and in new green technologies; also unemployment benefits should be sharply increased together with a targeted tax rebates only for lower income households at risk; and federal block grants should be given to state and local government to boost their infrastructure spending (roads, sewer systems, etc.). If the private sector does not spend and/or cannot spend old fashioned traditional Keynesian spending by the government is necessary. It is true that we are already having large and growing budget deficits; but $300 bn of public works is more effective and productive than spending $700 bn to buy toxic assets. So we are now very close to the systemic financial meltdown that I outlined in my February paper. But radical action can be taken and should be taken to control the damage and prevent this meltdown from occurring. At this point the US, the advanced economies (and now most likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on. We are already now in a global recession that is getting worse by the day. What radical policy action can only do is preventing what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade long economic depression. The financial and economic conditions are extreme; thus extreme policy action is needed now to save the global economy from an ugly depression.