It is a small measure of the dramatic financial meltdown of 2007-08 that leading representatives of western liberal capitalism ransacked the past for reference-points to convey its scale. The "most wrenching [financial crisis] since the end of the second world war", said former chairman of the United States Federal Reserve, Alan Greenspan, in March 2008; the "largest financial shock since the great depression", said the International Monetary Fund (IMF) in April; even "the largest financial crisis of its kind in human history" said the deputy governor of the Bank of England, Charlie Bean in October.

Also in openDemocracy on the global financial crisis of 2007-08:

Tony Curzon Price, "Responsible recessions" (3 April 2008)

Willem Buiter, "The end of American capitalism (as we knew it)" (17 September 2008)

Fred Halliday, "The revenge of ideas: Karl Polanyi and Susan Strange" (24 September 2008)

Godfrey Hodgson, "The week that democracy won" (29 September 2008)

Tony Curzon Price, "Unprincipled madness" (1 October 2008)

Grahame Thompson, "Deglobalising the crisis" (3 October 2008)

Will Hutton, "Wanted: a fairer capitalism" (6 October 2008)

Avinash Persaud, "Europe's financial crisis: the integration lesson" (7 October 2008)

Paul Rogers, "A world in flux: crisis to agency" (16 October 2008)

Andrew Dobson & David Hayes, "A politics of crisis: low-energy cosmopolitanism" (22 October 2008)

Paul Rogers, "A crisis-opportunity moment" (23 October 2008)All this before the crisis has run its course. For even after the massive bailouts and banking takeovers of September-October 2008, there is no end to the fear and panic in global stock-markets. A problem that was (during the epic week of 22-28 September when the Hank Paulson plan to stabilise Wall Street was being debated) seen by some complacent Europeans as being confined to the United States soon came to force European governments too into emergency responses; after Iceland's desperate situation was exposed, now emerging markets in east-central Europe (Hungary, Ukraine) have needed urgent assistance to provide credit and shore up the currency. For some global-south countries (Pakistan, Argentina) the difficulties are even more severe; and several of Asia's powerhouse economies (South Korea, China) have been forced into a rapid rethinking.

A systemic problem

The prospect that the huge funding packages of these weeks will not contain the problems, and that indeed things may get even worse, is terrifying for central-bank governors, financial institutions and politicians - and indeed for the citizens who will carry the greatest burden of the crisis in terms of disappearing jobs, repossessed homes, and tightened credit.

Yet I believe things will indeed get worse, for one reason above all others: that those in the financial and political establishments charged with making decisions to contain the crisis have shown themselves inadequate to the task. In particular, elected finance ministers, International Monetary Fund (IMF) staff, the governor of the European Central Bank (ECB), Jean-Claude Trichet and his fellow central-bank governors persist with flawed economic policies:

* dear money or high real rates of interest which aggravated the downturn by amplifying debts, bankrupting debtors and accelerating deflation

* sustained capital liberalisation - despite shocks to exchange rates, global imbalances and volatility 

* the dumping of even more debt on to the giant Ponzi scheme that is the globalised economy.

These policies have been responsible for a pernicious cycle in which easy money fuelled easy credit; easy credit fuelled consumption, which in turn fuelled economic growth; and alongside, "easy jets" and "easy cars" helped fuel a massive expansion of toxic greenhouse-gas emissions. 

This sequence makes clear that what is at stake is more than a financial breakdown that can be repaired by policy adjustments at the margin. Rather, the excessively indebted global economy is but one aspect of an  unprecedented triple crunch, each element of which has contributed to the current crisis:  

* an enormous Ponzi scheme of debt

* peak oil

* climate change.

It is becoming clearer that at heart the resulting crisis is "systemic" not "conjunctural", and that it requires a holistic response that addresses it in its linked as well as singular aspects: financial-economic, governance-political, environmental-ecological (see John Elkington & Mark Lee, "Finance, politics, climate: three crises in one", 14 October 2008). A small group of economists connected to the new economics foundation (nef) has proposed such a holistic approach, which they have termed a "green new deal". To implement this set of policies will require using all the resources of democracy to  make governments and regulators switch course, guided by and understanding that the threat of debt, peak oil and climate change must be addressed in imaginative and radical ways. 

A model infusion

The latest dominoes to fall have been in Europe. This is in part thanks to the misjudgment of one of the most orthodox central bankers, Jean-Claude Trichet - who has (as Aurelia Maccario notes) been exposed by the collapse of both the real and the financial European economy. In a show of macho defiance, he had in 2007 already rebuked Nicolas Sarkozy for objecting to the ECB's higher interest rates, and for not "adapting faster". In July 2008, at the height of the worst debt crisis in modern history, he and his board hiked borrowing costs on loans in the European Union.Ann Pettifor is executive director of Advocacy International.

In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave, 2003) and author of The Coming First World Debt Crisis (Palgrave, 2006)

Also by Ann Pettifor on openDemocracy:

"The coming first world debt crisis" (1 September 2003)

"Ethiopia: the price of indifference" (19 February 2004)

"Gleneagles, 7/7 and Africa" (4 July 2006)

"Debtonation: how globalisation dies" (15 August 2007)

"Globalisation: sleepwalking to disaster" (11 December 2007)

"The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008)

"America's financial meltdown: lessons and prospects" (15 September 2008)

"The week that changed everything" (22 September 2008)

By this action they helped precipitate the crisis now engulfing economies like Hungary. Hungarians, like many east-central European citizens and companies, were lured by EU promises into buying mortgages and loans in euros and Swiss francs. These borrowers have now been hit by the fall of the currency in which they earn income (Hungary's forint), relative to the currency (the euro or Swiss franc) in which they owe debts.

The borrowing costs on their euro-denominated debts were increased by the decision of the European Central Bank (ECB) to raise rates. Its governor, Jean-Claude Trichet, somewhat embarrassed by the negative impact of that decision, now offers to "rescue" Hungary, by dumping another €5 billion ($6 bn) on an already debt-burdened economy. High interest rates and heavy economic conditions will further undermine Hungarian economic independence, and could cause social, political and ecological dislocation. 

The policies of the ECB, of other central banks, and of finance ministries and treasuries mean that the world is now embarked on a debt-deflationary spiral that destroys the value of assets, wages, incomes, goods and services - and will lead to political and social upheaval. The threats are very grave. 

The IMF's predatory lending has been rebuffed by emerging markets ever since its policies first caused and then exacerbated the southeast Asian crisis of 1997-98 and the Argentinean crisis of 2001. It seems not to have learned its lesson: for now it is pouring more debt down the throats of bankrupt countries like Iceland and struggling economies like those of Hungary, Ukraine, Pakistan and Argentina. The IMF is also encouraging central bankers to play the speculators' game by raising interest rates (in Hungary, for example, they were raised on 22 October 2008 to a staggering 11.5%.

This is unbelievable good luck for those hedge-fund managers facing major losses elsewhere, and roaming the world for gains; but this luck is predicated on the now inevitable bankruptcies of small and large businesses in Hungary's domestic economy, and on the livelihoods of those who are amongst the lowest-paid in Europe. It will come as no surprise if people in Hungary and elsewhere of all classes become disillusioned and angry at the failure of their central-bank "guardians" to protect their country's interests and finances; the chances of a populist backlash are thereby strengthened (see Andrew Dobson & David Hayes, "A politics of crisis: low-energy cosmopolitanism", 22 October 2008).

The IMF will further oblige international speculators by injecting billions of dollars into the bloodstream of central banks drained of hard currency.  This transfusion of capital will enable international investors and speculators to make a quick "smash, grab and getaway" - leaving central banks with even more debts, owed at high real rates of interest to the IMF. To repay these debts, without any change in basic structures or operating modes, will require even greater exploitation of labour and the ecosystem. 

The orthodox economic policies that aggressively deregulated lending and encouraged borrowing, also held down incomes while boosting consumption. In the context of prevailing industrial and commercial patterns, both had the effect of inflating greenhouse-gas emissions and contributed further to the creation of a global "debtonation".

When high real rates of interest raised borrowing costs, making debts unpayable, the collapse of the Ponzi scheme was inevitable. Now the chaotic deleveraging of debts is leading to the deflation of asset prices, particularly property prices, to bankruptcies, stock market falls and unemployment – with no end in sight.

The increasingly desperate actions of central bankers and finance ministers -  and the silence or irrelevance of academic, neo-liberal economists - are evidence of the flawed nature of the past generation's economic orthodoxy, and of the intellectual bankruptcy of the world's ruling elite. 

A democratic deficit

What strategy and policies should democratic citizens and progressive forces around the world adopt to help the global economy recover and challenge the destructive policies of these elites? (see Paul Rogers, "A world in flux: crisis to agency", 16 October 2008). It will not be easy, but three processes are essential 

First, it will be important to divert popular anger away from bankers and their bonuses towards the institutional failings of the real transgressors: the central-bank governors, regulators and the political legislators that created the framework for the giant house-of-cards that is global debt. It was politicians and regulators not private bankers or other oligopolistic businessmen who legislated for, facilitated and permitted the creation and growth of easy (but never cheap) debt that has fuelled both consumption and greenhouse-gas emissions. 

It's true that private bankers or oligarchs have effectively ensnared politicians. But in the end it is regulators that draft policy and politicians that sign and agree legislation; only regulators and legislators, prompted by citizens-voters informed with democratic arguments and ideas for change, who can implement a system-wide fix.  

Second, citizens all over the world need to build the political parties and movements that will rise to the challenge of climate change, peak oil and the current global financial meltdown.

In liberal-democratic countries whose democratic systems have withered or which still have inbuilt unfairness (such as Britain, with its centralised and winner-takes-all electoral system), this will mean an energetic work of reform. Democratic political parties in the past decades have been hollowed out of political content and power. The signs of revival around the Democratic Party in the United States - if they continue and are consolidated in practical results - are an encouragement to all those wishing to challenge the status quo in democratic economies.

To succeed, political parties must be rebuilt from the bottom-up. Such initatives as Moveon.org provide clear evidence that by exploiting the openness, plurality and uncensored reach of the web - and combining these strengths with down-to-earth, face-to-face "townhall meetings" - activists can reclaim the political agenda. 

This major task of democratic revitalisation will take time, but it is an essential process if the policies needed for restoring balance to both the economy and the ecosystem are to be informed by the active discussion and engagement of citizens.  

A radical agenda

The heart of such policies are a series of principles that if followed would lead to a more stable, strong and sustainable political economy that can begin to meet the tests of debt, peak oil, and climate change:

* unpayable debts must be recognised as unpayable, and written off. This needs to done as far as possible in an orderly, structured manner, and with due attention to principles of fairness and awareness of the causes of high levels of debt

* the monetary system must be managed in the interests of society as a whole, not just the finance sector

* debt/credit-creation must be carefully regulated

* capital flows must be regulated, and the power to fix the key levers of the economy (interest-rates and the exchange-rate) must be restored to elected, sovereign governments- accountable to labour and industry, and accountable to the ecosystem

* publicly accountable central banks must be free to a) inject debt-free money into the economy, and b) keep the cost of borrowing low, so that loan-expenditure projects can be easily financed

* incomes must be raised, to restore the balance between an economy burdened with debts and stripped of pensions, and people starved of income to repay those debts or unable to live in dignity

* there must be no eviction of people from their homes because of unpayable debts

* new forms of social, cooperative housing and housing finance should be developed

* resources must be raised to create jobs, by using the monetary tools above and by filling tax-loopholes and closing tax havens

* a "carbon army" of green-collar workers must be mobilised to insulate homes, transform every building into a power station, and build alternative sources of energy

* trade must be localised and regionalised in order to limit the impact of emissions, to cut oil consumption and to end trade imbalances, with only exceptional items traded internationally (when war-memorial panels in northeastern England containing lists of names of the fallen are stripped for the metal they contain to feed a ravenous global commodity-market, the destructive consequences of the dominant form of globalisation are vividly revealed)

* a new global and independent central bank should be established - based on JM Keynes's International Clearing Union - to manage and stabilise trade between countries, and to create both a trading currency and a reserve asset that is neutral between countries. This should be on the agenda of the G20 summit in Washington on 15 November 2008 as part of the discussion of a "new Bretton Woods" settlement.

In other words, the way beyond this period of severe crisis and multiple threats lies in a green new deal.