It sounds counterintuitive: Solve a debt crisis with more debt? Surely, many politicians these days view debt – specifically, the national debt – as something to hold in check.
But the key here is that even as some Americans feel pressure to reduce their own debt or to default on it, a growing economy depends on a healthy flow of loans and other financing (such as stock offerings).
The path to a stronger recovery, some economists say, lies in healing the financial system – or in using Federal Reserve activism as a surrogate until banks can heal themselves.
In the mid-1930s, a revival of the economy coincided with a revival in the growth of bank credit fueled by the Fed's monetary policy, notes Paul Kasriel, chief economist at the Northern Trust Co. in Chicago. His idea: The Fed should set a target for the growth of bank credit (such as 5 percent a year). If private-sector banks don't hit that target on their own, he says, the central bank would add credit by buying securities such as bonds.
