Major New Bailout Good Move But Won't Stop Recession

11/10/2008 05:12 am ET | Updated May 25, 2011

The crash continues to roll from one market to the next, and huge new bailout talks are underway. We're analyzing this morning's events live at Clusterstock -- please feel free to join us. We'll keep the discussion open until about 11:30 ET. Then we'll post the transcript here.

Meanwhile, here's the latest on the major new bailout discussions:

The NIKKEI closed down 10%, and the FTSE is down 8%. The US and UK governments are working on a massive new bailout plan that might include:

* Temporary guarantee of all bank deposits
* Guarantee of all interbank lending
* Capital injections into banks.

These are some of the critical recommendations put forth by many economists, including Nouriel Roubini and Paul Krugman. (Another is major new fiscal spending -- a new New Deal).

The first move, guaranteeing bank deposits, will calm frantic runs on banks. The second, guaranteeing interbank lending, will enable banks to risklessly lend to each other again (this has all but stopped). The third, injecting capital, will tackle the heart of the banking problem, which is that most banks are now grossly undercapitalized (the IMF estimates that western banks need $675 billion of new equity).

These are huge, positive steps that might begin to ease the credit markets. In Nouriel Roubini's opinion, however, they will help reduce the chances of a global economic catastrophe. They may also put western governments and taxpayers in serious financial trouble. They are not likely to head off a severe, prolonged recession.