Two days of decline totalling nearly l,900 points on the Dow in 3 trading days means that time for euphemisms is over. It is no longer a correction.

We are already in a bearish market. Financial markets reflect fundamentals and sometimes, as they overshoot, they influence fundamentals. They are at that point now.

Given the size of the Russian debt market and its GDP, the consequences of its debt repudiation, currency devaluation and moratorium on foreign obligations on the western economies and their corporate sector, should not be too deep. But market reaction has been excessive and looks set to turn their fears of disinflation/deflation into a self-fulfilling prophecy.

To this panic, policy-makers have responded mostly with passivity. Perhaps, the scale of the still-unfolding tragedy has dulled their reactions. US central bankers, who have expressed concern in the past year about the non-existent threat of inflation, have been conspicuously silent. This asymmetry in their response is unjustified. If financial market exuberance is undesirable, financial market panic is worse.

The world's leading economic powers cannot continue to pretend that what is happening is in some other planet. Markets are desperate for some action on their part to ease the oncoming global demand recession.

Of all, the Japanese government has confounded us with its lack of decisiveness in the face of such a sustained market onslaught. It is not that they have not attempted to do anything. Japan's supposedly gradualist approach to the problems at the Long-Term Credit Bank of Japan (LTCB) and in other banks is perhaps appropriate under the circumstances. But the government has done such a poor job of establishing its policy credibility that its actions merely end up creating the opposite effect.

In this information age, governments cannot win by deceit. Absence of credible information leads intelligent people to make the most conservative (risk-averse) assumptions. This rule has been proved to be correct time and again - in personal, corporate, national and international affairs. Yet, politicians stick to economy of information defiantly, before forces far bigger than they could control sweep them away.

Who can orchestrate a global response? The responsibility falls on the US again. Europe is just about struggling to recover economically and its major power, Germany, is in the middle of an election campaign.

The US Treasury has the twin task of handling delicately the power transition and economic crisis in Russia and to cajole Japan into more decisive measures without tipping the world economy over the edge. Russia has to be handled with a fair mixture of carrots and stick. Assurances that it is not preparing for political and economic isolation should be extracted in return for substantial help in establishing economic institutions and a policy framework that restores predictability and order to its affairs. The world can ill-afford a Russian social and economic collapse and the resumption of a global arms race at this stage.

Central bankers must declare their readiness to provide the world with adequate liquidity should any decisive action by the Japanese prove unsettling to the financial market. They should also ponder whether their fixation with inflation prevented them from doing enough and sooner.

The underlying fundamentals of the US economy are still sound - the second- quarter GDP growth was revised up and durable goods' orders rose sharply in July - but it may not be long before this most important pillar of global growth is removed by the collapse of the financial markets. Already, there are signs that retail investors are not rushing to buy into market declines. Soon, they may sell and allow bad times in the market to roll on with the inevitable spillover into the real economy.

The Fed should realise that the biggest threat to inflation in the US is an economic slowdown. The slowdown will kill productivity-enhancing investments and thus, remove the antidote to rising wages. Empirical evidence suggests that productivity growth has neutralised wage increases and kept inflation in check during the current economic expansion in the US.

In turn, it has been boosted by corporate investments that were buoyed by profitability. The virtuous circle is about to stop spinning. The time for the Fed is to act now. There is no need to worry about the delayed inflation impact of any current monetary- policy expansion. There will be plenty of time to change course, as global demand will recovery only gradually. The pan-European unemployment rate is still in double digits. In the final analysis, it is good to remember that price-stability is only a necessary condition for sustained economic prosperity. When that is at stake, all other concerns must become secondary.