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t is now almost a year since the world economy teetered on the edge of calamity. In the span of three days, Sept. 15-17, 2008, Lehman Brothers filed for bankruptcy, the mega-insurance company AIG was taken over by the United States government, and the failing Wall Street icon Merrill Lynch was absorbed by Bank of America in a deal brokered and financed by the US government. Panic ensued and credit stopped circulating. Non-financial companies could not get working capital, much less funding for long-term investments. A depression seemed possible.

Today, the storm has broken. Months of emergency action by the world's leading central banks prevented financial markets from crashing. When banks stopped providing short-term liquidity to other banks and industrial companies, central banks filled the gap. As a result, the major economies avoided a collapse of credit and produ-ction. The sense of panic has subsided. Banks are once again lending to each other.

Although the worst was avoided, much pain remains. The crisis culminated in a collapse of asset prices at the end of 2008. Middle-class and wealthy households around the world felt poorer and therefore cut their spending sharply. Sky-high oil and food prices added to the pain, and thus to the downturn. Enterprises could not sell their output, leading to production cuts and layoffs. Rising unemployment compounded the loss of household wealth, throwing families into deep economic peril and leading to further cutbacks in consumer spending.

The big problem now is that unemployment continues to rise in the US and Europe, because growth is too slow to create enough new jobs. Dislocations are still being felt around the world.

A huge debate has ensued around the so-called "stimulus spending" in the US, Europe, and China. Stimulus spending aims to use higher government outlays or tax incentives to offset the decline in household consumption and business investment.

In the US, for example, roughly one-third of the US$800-billion two-year stimulus package comprises tax cuts (to stimulate consumer spending); one-third is public outlays on roads, schools, power, and other infrastructure; and one-third takes the forms of federal transfers to state and local governments for health care, unemployment insurance, school salaries, and the like.

Stimulus packages are controversial, because they increase budget deficits, and thus imply the need to cut spending or raise taxes sometime in the near future.

The question is whether they successfully boost output and jobs in the short term, and, if so, whether they do enough to compensate for the inevitable budget problems down the road.

The true effectiveness of these packages is not clear. Suppose that the government gives a tax cut in order to increase consumers' take-home pay. If consumers expect that their taxes will rise in the future, they may decide to save the tax cut rather than boost consumption. In that case, the stimulus will have little positive effect on household spending, but will worsen the budget deficit.

An early assessment of the stimulus packages suggests that China's program has worked well. The sharp fall in China's exports to the US has been compensated by a sharp rise in the Chinese government's spending on infrastructure - say, on subway construction in China's biggest cities.

In the US, the verdict is less clear. The tax cut has probably been saved rather than spent. The infrastructure component has not yet been spent because of long lags in turning the US stimulus package into real construction projects. The third part - the transfer to state and local governments - almost surely has been successful in maintaining spending on schools, health, and the unemployed.

In short, the US stimulus effects on spending have probably been positive but small, and without a decisive effect on the economy. Moreover, concerns about the enormous US budget deficit, now running at $1.8 trillion (12 percent of GNP) per year, are bound to increase, not only creating enormous uncertainties in politics and financial markets, but also dimming consumer confidence as households focus their attention on potential future budget cuts and tax increases. The US has reached the practical limits of reliance on short-term stimulus spending, and will need to start cutting the budget deficit and fostering alternative pathways to growth.

When the crisis deepened a year ago, Barrack Obama introduced into the presidential campaign the theme of a "green recovery," based on a surge of investment in renewable energies, new electric vehicles, environmentally efficient "green" buildings, and ecologically sound agriculture. In the heat of the battle against financial panic, policy attention turned away from that green recovery. Now the US needs to return to this important idea.

Debt-burdened consumers in the US and Europe will limit their spending for years to come as they rebuild their wealth and pension assets. But the resulting economic slack gives us the historic opportunity - and need - to compensate for low consumer spending with increased investment spending on sustainable technologies.

Government policies in the US and other rich countries should stimulate those investments through special incentives. These include a cap-and-trade system for greenhouse-gas emissions, subsidies for research and development on sustainable technologies, feed-in tariffs and regulatory incentives for renewable energy, consumer subsidies and other inducements for the uptake of new "green" technologies, and implementation of "green" infrastructure programs, such as mass transit.

The rich world should also provide the poorest countries with grants and low-interest loans to buy sustainable energy technologies, such as solar and geothermal power. Doing so would add to the global recovery, improve long-term environmental sustainability, and accelerate economic development.

The crisis can yet be an opportunity to turn from a path of financial bubbles and excessive consumption to a path of sustainable development. In fact, seizing this opportunity is the only recipe for genuine growth that we have left.