…but also we've seen a collapse of the "shadow" banking system of broker-dealers, non-bank mortgage lenders, structured investment vehicles, hedge funds, and private equity firms—all of which borrow short and liquid, leverage those borrowings up and lend long and illiquid. As the stuff that they've borrowed falls in value, they are suffering a run on their liabilities; this has forced them to sell illiquid assets into the hole. With few buyers, many more will slip into insolvency, he says.

Making things worse, all advanced economies, representing 55% of global GDP, entered recession before this financial shock occurred, making the credit crunch more virulent. As a result, the crunch will push mild recessions into severe recessions, or worse, he says. Now even markets with large current account surpluses, such as Brazil, India, Russia and India, are at risk of a hard landing. The slowdown of trade and currency flows are forcing them to face a severe financial crisis.

The sources of these issues were the combination of a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble. All are now bursting at once amid the biggest real estate and bank bust since the Great Depression. This can only mean that delusions that the advanced economies will merely suffer a short and shallow V-shaped recession are out the window, as a more protracted L- or U-shaped recession that lasts at least two years in the United States and Europe becomes more likely, Roubini says. Consider that the latest recession in Japan lasted 10 years, and you know this can certainly happen.

Recession and Solutions

As these issues play out, we have an excess of goods in the United States and Europe while demand is falling, so deflation becomes more of a concern than inflation. It's virtually impossible to fight deflation with monetary weapons, so this is a real problem. As a result, Roubini believes that the worst of the stock market crashes are still ahead of us, including the possibility of a 20%-plus crash such as the one seen in 1987. Panic is only now beginning to rise, as people will want their money out of paper assets at any price, and there appear to be no credible leaders to calm them down.

Every attempt to contain the panic has failed so far, and this is what disturbs me the most. We got a two-month reprieve out of the Bear Stearns rescue, then a one-month retrieve on the announcement of legislation to rescue of Fannie Mae and Freddie Mac; and then a one-day rally when the final deal was announced; and then the markets didn't rally at all on the bailout of AIG or the $700 billion bank bailout. Then on Thursday  we had an unprecedented, coordinated action worldwide to cut interest rates, as well as a new program to back commercial paper, and it resulted in a 7% decline in the Dow—the old Bronx cheer.

When no sensible rescues work, and no oversold conditions result in any rally, something is singularly wrong. It's a vicious cycle and there is no way that any analyst can call a bottom until some very dramatic new policies are attempted.

Roubini has a few ideas along those lines. They include another rapid, huge round of interest rate cuts globally; a blanket guarantee of all bank deposits; reduction of the debt burden of insolvent households and a temporary freeze on all foreclosures; massive unlimited provision of liquidity to all solvent financial institutions and businesses of all types and sizes; massive direct government stimulus including new public works, infrastructure spending, tax rebates to the middle class; and grants to local governments; total recapitalization of all banks.

The government may be on the path to this with word in the Wall Street Journal tonight that the U.S. might temporarily back all U.S. bank deposits and loans. This would be a great start.

This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.