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“The biggest fear is that long-term bond rates won’t come down in line with short-term rates. We’ll have the reverse of what we’ve seen in recent years, and that is what is frightening the markets,” he told the Daily Telegraph, while trudging through ice and snow in Davos.

“The mechanism of monetary policy is ineffective in these circumstances. I’m not saying it won’t work at all: it will help the banking system but the credit squeeze is going to go on because nobody trusts anybody else. The Fed is pushing on a string,” he said.

The grim comments came as markets continued to suffer wild gyrations, reacting to every sign of contagion spreading to Europe, Asia, and emerging markets.

Wall Street has begun to stabilize on talk of a rescue for the embattled bond insurers, MBIA and Ambac.

The Fed’s 75 basis point rate cut allows the banks to replenish their balance sheet by borrowing at short-term rates and lending longer term, playing the credit ‘carry trade’, hence the 9pc rise in the US financials index yesterday. But confidence remains fragile.

Professor Stiglitz, former chair of the White House Council of Economic Advisers, said it takes far too long for monetary policy to work its magic. This will not gain much traction in the midst of a housing crash.

“People have been drawing home equity out of the houses at a rate of $700bn or $800bn a year. It’s been a huge boost to consumption, but that game is now up. House prices are going to continue falling, and lower rates won’t stop that this point,” he said.

“As a Keynesian, I’d say the biggest back for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor. That will feed through quickly, but set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough,” he said