If you have built castles in the air, your work need not be lost," said Henry David Thoreau, an outstanding American author, poet and philosopher of the 19th century. "That is where they should be, now put the foundations under them," he argued. As the impending gloom in the world economy takes an ugly form, world leaders are busy building castles to grapple with the worsening financial morass.

Last week, French President Nicholas Sarkozy convened a brainstorming summit with other leaders as well as economists, historians and intellectuals to discuss how capitalism could be resuscitated. "Either we re-found capitalism or we destroy it," he warned. "Purely financial capitalism has perverted the logic of capitalism... it is amoral. It is a system where the logic of the market excuses everything."

His German counterpart Chancellor Angela Merkel concurred about the radioactive impact of financial markets and the misery they can unleash on the global economy. "Once everything is going better, the financial markets tell us: 'you politicians don't need to get involved because everything is working again'," she observed. "I will stay firm, we must not repeat the mistakes of the past," the centre-right German leader exhorted.

Such is the growing anger among right-wing western leaders who feel cheated by the recent spate of events following the collapse of the prestigious American investment bank Lehman Brothers last September. Since then, an unstoppable credit freeze - in which banks refused to lend to even their counterparts while businesses remain paralysed - has devastated almost every country.

Despite dropping trillions of dollars from helicopters as an antidote to address the enveloping "credit contraction" - which, by the way, is the lesson taught by the supply-side guru Milton Friedman to his disciples such as Ben Bernanke, the US Fed Chief - there has been no material change. If anything, policy-makers are finding it difficult to avert the full-blown recession degenerating into something worse.

In a bleak assessment on the "World Economic Situation and Prospects 2009", economists from the United Nations said the situation is "dire" and without any "bright spots." Countries, said the UN economists, must prepare "counter-cyclical" policies on a war footing in the face of a zero-growth prospect this calendar year. European Central Bank President Jean-Claude Trichet also echoed a similar assessment when he cut rates by another half a percentage point to 2.0 per cent last week to address the credit freeze.

Against this backdrop, Messrs Angela Merkel and Nicholas Sarkozy want to build an international financial regulator. They also want a new economic body similar to the UN's Security Council. But the United States has remained opposed to such a move until now. Washington under Barack Obama's presidency from today may have different ideas. Assuming they succeed in creating a new financial regulatory castle and even an economic security council, the issue remains whether the world can avoid the repeat of another Great Depression.

While the jury is still out, it is becoming clear that the current crisis is increasingly showing "a strong resemblance to the Great Depression." Though the rescue policies adopted now are somewhat different, the "underlying cause" between then and now is almost the same, according to a succinct essay written by James Livingston, Rutgers historian, on "Their Depression and Ours."

And that "underlying cause" is a redistribution of income towards profits, away from wages and consumption, or the "widening gap between rich and poor, or rather between capital and labour." The gap, if anything, widened further after George Bush's tax cuts that "produced a new tidal wave of surplus capital with no place to go except into real estate, where the boom in lending against assets that kept appreciating allowed the 'securitisation' of mortgages - that is, the conversion of consumer debt into promising investment vehicles."

The only way to overcome this crisis, he argued, is through strong fiscal policies for the foreseeable future by raising taxes on the wealthy and making net contributions to consumer expenditures out of federal deficits if necessary.

Coincidentally, noble laureates - Joseph Stiglitz and Paul Krugman - also cautioned against squandering stimulus measures by providing fresh tax breaks for businesses. Instead, they pressed for more investments in infrastructure. One hopes India is taking a cue from this debate!