FT columnist and economist Martin Wolf astutely observes that in the rush to evaluate whether the U.S. Federal Reserve's monetary policy easing and the U.S. Congress' $150 billion stimulus plan will work, we need to decide what 'will work' means.
Using the Fed's definition, Wolf says, the monetary/fiscal policy will have been judged a success if policymakers have eliminated any risk of a collapse into a Japanese-style deflation. (In the late 1980s, Japan fell into a decade-long deflation period after the collapse of a real estate boom and related asset prices.) Conversely, Wolf notes, Congressional officials, particularly those up for re-election, may not view the stimulus policy as a success unless the U.S. economy is growing at a healthy rate, at/above 3% GDP growth.

'Will work' bar too low?

The above, of course, leads to the natural question of "Is the 'will work' bar too low?" Economist David H. Wang says no.

The Fed, Wang said, must keep liquidity and the orderly function of the markets at the forefront. The situation is roughly analogous to a train traveling on railroad tracks, with the Fed as railroad operator and track manager. The train needs fuel and the track has some ties that need replacing up ahead. The Fed has to be concerned that the train has enough fuel, but it also has to make sure the track is safe ahead. Fed interest rate cuts, and the $150 billion fiscal stimulus package, are the economy's 'fuel' and the term auction facility represents the new 'ties' for the economy's track.

Given the size and complexity of the Fed's task, the 'will work' bar is not too low. "Just keeping the economy in a condition where it will be able to grow at a normal rate in the future would constitute a success," Wang said. "And just achieving that goal will require considerable effort." A considerable effort, Wang says, because future subprime mortgage and related asset defaults, bond insurer solvency concerns, declining home prices, and above-average consumer credit card debt are "problem areas of the track up ahead that threaten to drive the train (economy) off the track."

Therefore, those hoping for a return to robust economic growth in the second half of 2008 "have unrealistic expectations," Wang said.

"That may not be a pleasing answer to those incumbents in Congress who are running for office, but that does not change the economic reality," Wang said. "There are many forces acting to contract the economy, so just keeping the economy in a position to grow, or on the tracks, will be a success and a major achievement in itself."