To loan or not to loan

A new post at Economist's View raises again a question that keeps bouncing around regarding the economic recovery strategy: Should people be saving or borrowing? The quoted article's main point is the contention that excess consumer borrowing rather than stock speculation was the cause of the Great Depression. Ever since last fall's financial crisis, the government's primary stated objective has been to get banks loaning money again--even though everyone agrees excess debt was what created the crisis in the first place. The article and many of the comments cast serious doubt on this strategy. Rather than saving the banks, they argue, this sector needs to contract. Rather than extending credit it needs to remain tight, with the inevitable resulting foreclosures and bankruptcies.

In this view the options seems to be: take the pain now and fix the system once and for all, or minimize the pain and drag out the problem for years to come. This also may be at the heart of the conflict between the aggressive US/UK approach and the more restrained strategy of the continental Europeans. In the latter case, one of the main reasons they are more willing to "endure" the crisis rather than rush to ameliorate it is their more extensive social safety net of public health care, extensive unemployment benefits, etc. If the US had such programs in place, would Washington be advocating a different policy? Are we doing what's right, or are we taking the easy way because we don't have the political stomach to do what's actually necessary?