How bad is the current crisis? Bad enough for Barack Obama's new US administration to reach a deal with Congress on an $827bn (£560bn) stimulus package, worth almost 6% of GDP if delivered in a single year.

Bad enough for the Bank of England to lower its key interest rate to just 1% — a level I never thought I'd see in my lifetime.

And bad enough for Wen Jiabao, the Chinese premier, to indicate that China's authorities may have to offer even more emergency support despite already providing a massive shot in the arm of the domestic Chinese economy late last year.

Fear not, though. As policymakers frequently note, the tools in their policymaking toolkits are so wide ranging and ultimately so impressive that no matter what the underlying economic risks, an easy solution lies just within reach.

It would be nice to believe this ultimately optimistic view of economic life. It derives from two related sources. The first is what has become known as the “Greenspan put”, the idea that, whatever awful difficulties descend upon the world economy, policymakers stand ready to clear up the mess.

The second comes from Milton Friedman's interpretation of the 1930s. He argued that the Depression need not have been so bad had the Federal Reserve loosened monetary policy promptly and aggressively.

But are these views right? The evidence from the last 18 months is disheartening. Policymakers have used much more ammunition than anyone could have predicted back in the first half of 2007 when banks had plenty of funds and investors were falling over each other to buy mortgage-backed securities.

Since then, the financial system has ground to halt. Yes, interest rates have come down and, recently, interest rate spreads have narrowed. The price of credit, though, is not the central problem.

The credit crunch is ultimately a story about the quantity of credit, chiefly because banks have lost vast sources of funds with which to support lending as a result of the collapse in securitisation.

Although the heavy guns of economic policy have now been fired on numerous occasions, economic performance around the world has been dismal, culminating in a frenzy of disastrously weak numbers over the last couple of months.

In December, manufacturing output in the US and the UK was down around 10% year-on-year. German industrial production was down 12% over the same period. As for Japan, output was down 20% year-on-year. It's enough to make you weep.

So far, there's little evidence the policy stimulus is working terribly well. Of course, many of the more aggressive policies were only set in train following the failure of Lehman Brothers in September.

The Federal Reserve, for example, has been buying a wider range of financial assets, in effect becoming America's commercial bank of last resort. The Bank of England is now heading down the same road.

Meanwhile, with most governments loosening fiscal policy, budgetary stimulus should be more effective: for every domestic tax cut that leaks out of the country via higher imports, there's a foreign tax cut which should contribute to higher exports.

These policy responses tell us the economic patient is no longer suffering a minor ailment but is, instead, in intensive care. Economies, unlike individuals, don't die, so there's little chance of the curtains closing on hundreds of years of economic progress.

Nevertheless, the willingness to contemplate policies which, in conventional times are nothing short of outrageous (printing money, running massive budget deficits, undermining the independence of central banks etc) suggests policymakers still have a mountain to climb.

There are two big problems. First, what's the right amount of policy stimulus? The answer depends on the scale of the expected problem. Given that policy changes have an impact on economic activity only with a lag, policymakers need to gauge their actions according to projections of where the economy might be heading.

A year ago, no one was able to forecast the extent to which the global economy was about to fall off a cliff, so policymakers were unable to come up with a series of stimulus plans back then which would have carried any credibility either politically or in the world's media.

Making a judgement on the likely economic outcomes of the latest stimulus measures requires a leap of faith with regard to the path for the world economy in the absence of these measures. Knowing, for example that a stimulus package will add, say, 1% to the level of GDP tells you very little about the actual growth rate.

Second, the stimulus needs to be credible. As interest rates sink to zero, as central banks buy up financial assets and as governments run bigger budget deficits, policymakers need to offer cogent explanations to the public of why these policies will work.

Quantitative easing becomes the default monetary policy only when interest rates have dropped to zero. Given that quantitative easing is not used in normal circumstances, it comes across as a second best option. The public, rightly, will wonder if it will work.

As for increasingly giant budget deficits, we might all be Keynesians now, but some of us are old enough to remember the counter-Keynesian revolution which took some of its ideas from David Ricardo's fiscal “equivalence”.

More government borrowing today means higher tax payments tomorrow: if the public understand this relationship, more government borrowing simply leads to higher private saving, a problem which blighted Japan's recovery through most of the last two decades.

The “something must be done” approach to policy is all very well, but the impression at the moment is that policymakers are lurching from one wheeze to the next as both the scale of the problem turns out to be bigger than expected, and the conventional ammunition runs dry.

Policies are increasingly being adopted through force of circumstance and the political desire for action, not as a result of a cold analysis of what is likely to solve the crisis. After all, many of the policies now being adopted were precisely those rejected in the 1980s and 1990s.

The underlying problem faced by policymakers is a massive breakdown of trust in the financial system, a difficulty which cannot be fixed overnight. Conventional policies typically cast their spell on the economy through banks and other financial intermediaries.

The case for unconventional policies ultimately rests on the idea that the financial system has to be bypassed to “protect” the real economy from the dangers of a Depression-style meltdown.

While there's nothing necessarily wrong with this approach, the best that can be hoped from these policies is a cushioning of the downside risks. We are now in a world of damage limitation, not a world in which recovery lies just around the corner.

Stephen King is managing director of economics at HSBC