"Recession-plagued Nation Demands New Bubble to Invest In," screamed the American satirical newspaper Onion. Indeed, it is not just the United States which is busy creating an investment bubble. Almost all leading economies are gripped by that phenomenon. In an attempt to salvage their economies from the most painful economic crisis in recent decades, the speed with which countries are mounting fiscal and monetary actions has few parallels.

Consider, for instance, what Europe's central banks did last week. Faced with the prospect of a deep and protracted recession, which has already spread like a bubonic plague claiming hundreds of thousands of job losses, these banks resorted to what James K Galbraith recently called "the first rule of central banking." And that is "when the ship starts to sink, central banks must bail like hell."

In a swift move, the European Central Bank (ECB), the Bank of England, and the Swedish and the Danish central banks announced unprecedented interest rate cuts last Thursday.

Known for its cautious monetary policy since it came into existence ten years ago, the ECB took the extreme step of cutting its main refinancing rate for banks by 75 basis-points, leaving the benchmark rate at 2.5 per cent.

The Bank of England -- which has already reduced its benchmark rate by 200 basis points during the past two months -- announced a further reduction by 100 basis points that would bring the rate to 2 per cent. Sweden's central bank -- Ricksbank -- lowered its key rate by 1.75 percentage points while the Danish central bank chose to cut the benchmark rate by 75 basis points.

These aggressive cuts have merely followed a precedent set by Japan and the US Federal Reserve. The US which has lowered its interest rate to 1 per cent recently is not unduly worried over going down to a zero rate while Japan's rate at 0.3 per cent is almost close to nil. Effectively, industrialised countries have pretty low rates anyway and are close to issuing base money or printing notes to purchase securities from any source.

Underlying these unprecedented actions by the trans-Atlantic central banks is the writing on the wall: key parts of the global financial system are dysfunctional. "With credit and money markets essentially frozen and equity prices plummeting, banks and other financial firms saw their access to funding eroded and their capital base shrink, owing to accumulating mark-to-market access," says the Bank for International Settlements (BIS) in its latest quarterly review.

Reckoned as the ultimate watchdog for central banks, the BIS notes even emerging markets are not spared. Because of "depressed levels of risk appetite and associated pressures in the industrialised countries," the emerging economies are also getting sucked into the global crisis.

Thus, the market developments between September and November underwent four more or less distinct stages, says the BIS.

 "Stage one, which led to the Lehman bankruptcy in mid-September, was marked by the takeover by the US authorities of the government-sponsored housing finance agencies Fannie Mae and Freddie Mac.

Stage two encompassed the immediate implications of the Lehman bankruptcy and the crisis of confidence it triggered.

Stage three, starting in late September, was characterised by fast-paced and increasingly broad policy actions, as the response to the crisis evolved from case by case reactions to a more international, system-wide approach.

In the fourth, stage, from mid-October, pricing patterns were increasingly dominated by recession fears, while markets continued to struggle with the uncertainties surrounding the large number of newly announced policy initiatives.

Now the million-dollar question is whether these initiatives as well as stimulus packages running into hundreds of billions of dollars will deliver the desired results.

With trillions of dollars having melted in about three months and the global banking system having seized up, there is one lesson from all this. Never allow financial capital to dominate over the real economy. Keynes who was unpopular not long ago saw the danger coming. The day when financial capital reduces the real economy to "a bubble on a whirlpool of speculation," he said, there should be "euthanasia of the rentier"!