But the macroeconomic weakness in the US now goes beyond the decreased supply of credit. Falling house prices reduce household wealth and therefore consumer spending. Falling employment lowers wage and salary incomes. The higher prices of food and energy depress real incomes further. And declining economic activity in the rest of the world is lowering demand for US exports.

The US Federal Reserve has, in my judgment, responded appropriately by reducing the federal funds interest rate sharply and creating a variety of new credit facilities. The low interest rate helped by making the dollar more competitive, but otherwise monetary policy appears to have lost traction because of the condition of the housing sector and the dysfunctional state of the credit markets.

The US Congress and the Bush administration enacted a $100 billion tax rebate in an attempt to stimulate consumer spending. Those of us who supported this policy generally knew that history and economic theory implied that such one-time fiscal transfers have little effect, but we thought that this time might be different. Our support was, in the words of Samuel Johnson, a triumph of hope over experience.

In the end, our hopes were frustrated. The official national income accounting data for the second quarter are now available, and they show that the rebates did very little to stimulate spending. More than 80 per cent of the rebate dollars were saved or used to pay down debt. Very little was added to current spending.

So that is where the US is now: in the middle of a financial crisis, with the economy sliding into recession, monetary policy already at maximum easing, and fiscal transfers impotent. That is an unenviable situation, to say the least, for any incoming president.

... contd.