iStockphoto/Lyle Koehnlein

In the midst of the worst US economic recession in the post-war period, it is all too natural to be looking to high frequency economic data for signs of green shoots that an economic recovery might have begun. However, rather than grasping at straws, US policymakers would do better to honestly ask themselves the following two questions. Have the policy measures taken to date been commensurate to the enormity of the challenges posed to the US economy by the most severe asset price and credit market busts since the 1930s? Are we taking sufficient note of the adverse impact that the deepening economic crises in Europe and Japan will have on our economy?

The new Administration has correctly diagnosed that extricating the US economy from its present economic malaise will require coordinated policy action on three fronts. First, they recognize the need for an appropriately sized and well designed fiscal stimulus package. Such a stimulus is sorely needed to offset the very large negative impact on household consumption caused by the destruction of around US$14 trillion in US household wealth. Second, they acknowledge the urgent need to recapitalize the banking system in order to get credit flowing again through the economy. And, third they accept the need for bold policy measures to stem the present wave of foreclosures as the means to stabilize the US housing market.

As the actual details of President Obama's economic strategy have now finally emerged, one has to be struck at the gaping gulf between the Administration's diagnosis of what ails the economy and its policy prescription to promote a recovery. Particularly disappointing is the US$800 billion fiscal stimulus package. For far from being front-loaded, as the immediate downward economic spiral would seem to dictate, it defers its major impact to 2010 and 2011. And far from focusing on measures that would get the most "bang for the buck", it relies too heavily on tax cuts of the sort that singularly failed to boost the economy in 2008 and on infrastructure spending that by its very nature are slow acting.

Equally perplexing is the fact that, instead of addressing the bank insolvency issue head on, the Administration is choosing to continue the charade that the banks' problems are largely those of liquidity rather than those of solvency. As Tim Geithner's most recent presentation of his bank rescue plan reveals, the Administration is choosing to pursue its own version of the failed TARP policies of Hank Paulson. For rather than following a "good bank/ bad bank" model that might actually get bank lending flowing again, Geithner is restricting himself to engineering the purchase at fair value of around US$1 trillion of the banks' toxic assets. He is doing so seemingly oblivious to the unfortunate Japanese experience in the early 1990s of supporting zombie banks that led that country down the road to deflation.

In a robust global economic setting, an inadequate domestic policy response would be unfortunate. However, the global economy is anything but robust. Eastern Europe is on the verge of a wave of defaults that will reverberate through the West European banking system; visible cracks are now appearing within the Euro-zone itself; and Japan's economy appears to be in a freefall that the Japanese authorities appear to be incapable of stopping. This difficult global economic background would seem to heighten the urgency that US policymakers refrain from wishful thinking about an early bottom to our economy. Rather one must hope that they seriously consider their options for revamping the policy strategy in place to adequately address our worst economic crisis since the 1930s.

Desmond Lachman is a resident fellow at AEI.