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Governments all over the world are flooding the financial system with massive liquidity, at a level unseen since World War II. As the global economy is hit by the meltdown of financial markets, monetary authorities have to face three battles at the same time - shoring up the capital of banks, cutting interest rates to the floor, and pumping money into the real economy. As a result, we are witnessing government monsters - if one happens to champion private free enterprise - becoming bigger and bigger. Following the 0.50 percentage point cut in the Fed Funds Rate to 1.00 per cent last week, the European Central Bank is likely to lower its refinance rate by 50 basis points to 3.25 per cent when its governing council meets on November 6. The Japanese central bank has already cut its policy rate to 0.30 per cent. Before the year ends, the Fed Funds rate might fall further to 0.75 per cent, while the Japanese rate might also weaken to 0.10 per cent at the beginning of the year.

This week's ECB rate cut does not, however, imply that the EUR will be weaker. Indeed, the unwinding of JPY carry trades stopped after the G7 issued an emergency statement warning against excessive JPY volatility, which the market believed will give Japan the green light to support USD/JPY. This should augment the earlier step taken by the Fed in mid-October to ease the shortages in USD liquidity by providing unlimited swap lines to the European Central Bank, Swiss National Bank, Bank of England and Bank of Japan.

Ahead of the G20 summit in Washington on November 15, UK Prime Minister Gordon Brown has approached Middle East countries to provide funds to the IMF to help countries affected by the financial crisis. China had indicated earlier that it might contribute to the proposed new IMF fund. But it should have a bigger say in the direction of the international financial organisation. The IMF now has about US$250 billion (Bt8.7 trillion) in its war chest. But this will not be enough to meet the financial support programme it is expected to deliver to the countries facing financial turmoil.

The G20 summit is expected to showcase how developed and emerging economies close ranks to ease the crisis. The meeting is not expected to provide any breakthrough, as President George Bush will be gone by that time. Without the participation of a new US president, the summit will lack the leadership to forge a new direction for the global financial system.

But the Asia-Europe Summit in Beijing last week produced tangible results. Asia will set up a stabilisation fund worth US$80 billion by the middle of next year. This fund might evolve over time to become institutionalised so that it could act as lender of last resort for any crisis-hit Asian country. Once the fund comes into being, it will change the global financial landscape. Last week's decision by the Fed to extend swap lines to four emerging countries (Brazil, Mexico, South Korea and Singapore) also reinforced the important shift in G7 policy towards containing the fallout from the US-led crisis on emerging markets. Towards this end, it is becoming clear that further USD appreciation and more unwinding of JPY carry trades are now considered helpful to efforts to stabilise the system.

It is now a consensus that we are in a severe world financial crisis. The focus has shifted to how deep and long it will be. It is the worst since WWII. The depth of the economic crisis is harder to gauge. But it might be as severe as the early 1980s or the mid-70s. Continued poor economic data has led economists to cut back growth forecasts. Developed economies might contract by an annualised rate of 3 per cent in the fourth quarter and 1.8 per cent in the first quarter of 2009, levels not seen since the 1974 recession. Most notably, record low business surveys are forcing us to slash Japanese growth forecasts from 1 per cent to -3.5 per cent in the fourth quarter and from -0.5 per cent to -3 per cent in the first quarter of 2009.