?Some in clandestine companies combine; Erect new stocks to trade beyond the lines; With air and empty names beguile the town, And raise new credits first, then cry ?em down; Divide the empty nothing into shares, And set the crowd together by the ears.?

?Defoe

When Charles Mackay wrote his Memoirs of extraordinary popular delusions and the madness of crowds, more than two centuries earlier, little was he aware that his chronicling of the Mississippi Scheme, the South Sea Bubble or Tulip mania would be a near perfect description of Wall Street in the early 21st century. While narrating the behaviour of crowds, Charles Mackay wrote, ?Men, it has been said, think in herds, it will be seen that they go mad in herds, while they only recover their senses slowly and one by one?.

The world has witnessed, in the last month and a half, financial turmoil and economic carnage of a level and scale not seen since the Great Depression of the 1920s. It is only in the last week that there is now a feeling that we may perhaps be at the beginning of the end, or that the ?bottom may have bottomed out?. Even with that, the clouds of recession and deflation loom large and dark on the economic horizon. World leaders from G-20 countries will be meeting in the US on November 15 in this background.

The world economy, and the economies of all nations, both developed and developing, will need to recover, and this, at a very elementary level, will require rebuilding faith, trust and confidence, in themselves, and in each other.

If successful, this recovery will enable building further on the strength of a global economy, or a borderless world, as the world has witnessed in recent years. If not, and that in itself is a dismal and bleak prospect, the world will see not merely the specter of recession and deflation, but also increasingly protectionist trends, leading to isolationism, and loss of the advantages and advances that globalisation has enabled and facilitated.

The financial crisis that is now plaguing the world economy originated in the failure of the subprime mortgage market in the US. The real crisis, however, descended with almost no abatement, when financial stalwarts like Bear Stearns and Lehman Brothers collapsed and vanished from the directory of Wall Street firms.

Because of these extensive linkages of economies across the globe, the crisis on Wall Street spread not just to American Main Street, but to faraway Iceland, and countries as diverse as Hungary, Russia, Belarus, Korea, China, Pakistan, and even India. This, in turn, has led to further erosion of trust and confidence, and a psychology manifest in madness of crowds, narrated by Charles Mackay. So where does the answer lie, and where does one go from here?

Finance ministers and central bank governors from G-7 nations, meeting on the sidelines of the Annual World Bank and IMF Meetings, have agreed that the current situation calls for urgent and exceptional action, and that there is need to continue working together to stabilise financial markets and restore the flow of credit to support global economic growth. While the steps already taken have gone a long way in handling the present crisis, they may not go far enough, as can already be seen, from the fact of lurking recession, and the slowing down of economic growth in different regions of the world.

So what are the precise steps that are required in order to restore stability in the global financial system and prevent, or at least reduce the likely recessionary impact on economies across the globe? Action is needed at a global level, so as to prevent nations from working at cross purposes with each other, and action is also required at the level of individual nations, based on the specific requirements of individual nations.

At the international level, there is need for the following:

* Primarily, there is need a to restore faith and confidence in the banking system across nations, as well as in the ability of economies to pull out of recession.

* Secondly, an inter-governmental regulatory mechanism is required urgently in order to regulate cross border capital flows, including foreign institutional flows and many more.

* Thirdly, monetary policy adjustments as between nations need to be synchronised if they are not to work at cross purposes with each other. A mechanism is also required to regulate variations in interest rates across nations so as to reduce excessive movements of capital.

* Fourthly, countries in economic distress need to be able to borrow at short notice. While some relief on this count is possible through the International Monetary Fund, a faster and more readily accessible window is also required to handle sudden crisis caused by hitherto unknown variables.

* Fifthly, there is need to increase public investment through government investment, and also through foreign aid, wherever economies have been affected by the global turmoil very acutely on account of any of the reasons.

* Lastly, there is a need to develop a safety net for individual groups. This is crucial especially for those sections that have little to fall back on.

In addition to the actions enumerated above which are required to be taken at the international level, measures are also essential at the national level. Primarily, there is need to prevent panic, and retain faith and confidence in the financial system, banks and the economy.

Action on all these fronts, at the international and national levels, will enable ?recovery of the senses? and return of a sense of wholeness to the world economy. It can enable the global economy, and individual countries, to continue to grow in an integrated manner, without fear of madness of crowds and contagion of hysteria.

Of course, for all of this to happen will certainly require a new international financial architecture. Perhaps the upcom-ing summit of G-20 nations, where Prime Minister Manmohan Singh has been invited, can lay the foundation for such an international institution.

?The writer is a civil servant. The views expressed are personal