President-elect Barack Obama faces calls for a “stimulus” package to lift the flagging US economy. Recent asset price declines and job losses underscore these calls. Given the ineffective design of the most recent stimulus package, he would be wise to take a deep breath, then focus on several guidelines and four suggestions for action.

The first guideline is that the downturn is being driven by falling asset prices, which weaken the balance sheets of households and financial institutions, curtailing both lending and spending. Policies to stimulate the economy should focus on blunting falling asset prices.