What can we do to calm the bonkers, feral markets?

The markets are in turmoil. A week of dramatic falls on stock exchanges around the world has been interrupted by periodic rallies. The economic background? Fresh from a credit downgrade for the mighty United States, its central bank, the Federal Reserve, says it is unlikely to start raising interest rates from their current low levels of near zero for another two years. This is a clear indication that the economic recovery will be a long haul.

Investors are taking fright at the government debt of eurozone countries such as Italy and Spain, who they worry may default. There are also fears that if these countries require a bail-out, Europe's economic driver, Germany, may refuse to write the cheque.

It is not just the North Atlantic where economic warning lights are flashing. Investors worried about a double-dip recession in the great consuming countries of the US and western Europe fear that the Chinese economy, addicted to exporting to fuel its spectacular growth, will be dragged down too.

The latest news to cause a shares sell-off, was yesterday's false report that France was about to lose its AAA credit rating.

Commentators have been grappling with the question of what is going wrong – and what can be done to prevent world economies sliding back into recession.

Are the markets mad? The BBC's Robert Peston distils the paradox at the heart of the current market turmoil, asking: "Are lenders to government, creditors of banks and investors in shares behaving in the kind of way that would guarantee them the kind of losses that presumably they would wish to avoid? Are they completely bonkers, in other words?"

He points out that investors are currently obsessed with whether countries are able to pay their debts (hence the US's recent credit downgrade). Of course, to prove to investors that they can pay their debts, these countries are having to introduce ever more draconian austerity measures. This in turn makes the kind of economic growth that investors would like to see much less likely. The effect? "[Investors] sell shares in companies that would be hurt most by recession, especially banks."

Are the markets feral? Channel 4 News economics editor Faisal Islam, in New York reporting on what he calls the "feral markets" says on Twitter: "NY markets right now are a cesspit of rumour, supposition and guesswork, mainly about European political economy." As an example, he points out that yesterday's claim that France was going to lose its AAA credit rating was "nonsense". He reports what one US hedge funder told him: that "it's the New York hedge funds taking on the French Republic".

The markets are right to panic. Ian Plender, writing in the Financial Times, thinks markets are quite right to panic. "A marked shift in perception has taken place about which countries are really risky," he says. A senior investment officer told him: "Emerging creditor countries are trading more like blue chips, the US is trading more like a country in decline and developed debtor countries that lack the ability to print money are trading worst of all."

Plender concludes: "What the markets have grasped is that leading policymakers' strategies for handling these huge economic and financial challenges still amounts to no more than muddling through."

We need a global solution. "Is there anything that can still be done to douse the economic flames?" asks Jeremy Warner in the Daily Telegraph. Sadly not, it seems. Creditor and debtor nations "are ripping each other apart", he says.

"Some sort of agreement on burden-sharing must be found. We need a global solution... This process will not be kind to savers and creditors. One way or another, they are being made to pay for the profligacy of those who have spent beyond their means. Yet such a transfer is the only way of bringing the crisis to a meaningful resolution."

Encourage corporations to invest. Back to the Financial Times, and Joseph Stiglitz, a winner of the Nobel prize for economics, writes that "a long malaise now seems like the optimistic scenario". America's announcement that it will hold interest rates near zero for two more years is not the answer, because it is not high interest rates that are to blame for keeping the economy down.

"Corporations are awash with cash, but the banks have not been lending to the small and medium-sized firms that are, in any economy, the source of job creation." How to get banks to lend? Taxes. Governments must "restructure spending and taxes towards growth – by lowering payroll taxes, increasing taxes on the rich, as well as lowering taxes for corporations that invest and raising them on those that do not". ·