"Two One-Way Lanes on the Road to Ruin"
by John Hussman, Ph.D.
"Presently, we should not judge policy actions by their ability to punish saving, indiscriminately promote spending, relieve fear by making bad debt whole, or promote credit for its own sake. Instead, we should judge each policy action by its ability to reallocate resources toward productive uses, and to accelerate the restructuring of hopelessly bad debt that was carelessly extended in the first place. Many "standard" elements of economic policy can be crafted toward these ends, including infrastructure spending, R&D credits, unemployment compensation, funding of NIH and other basic research, and so on. Restructuring mortgage debt by using Treasury to administer, but not subsidize, property appreciation rights would also be helpful. By contrast, it is disastrously misguided to defend holders of bad debt, to distort financial markets, and to obstruct rather than facilitate the restructuring of excessive debt burdens.
...[the nation's economic] policies operate primarily for the benefit of banks and bondholders who made reckless and unproductive loans. To use Schumpeter's words, our public policy now operates 'in their interest and for their purposes.' It is the insistence of policy makers on making these bad loans whole, instead of restructuring the obligations, that is at the heart of our prolonged economic slump.
Undoubtedly, borrowers are also responsible for the losses, but it is always the lender and the investor who is responsible for judging the risk and character of the businesses and individuals to whom they extend credit. As Schumpeter noted 'The entrepreneur is never the risk bearer. The one who gives credit comes to grief if the undertaking fails.' When investors and lenders stop being mindful of risk, believing that somebody else will bail out the loss, the misallocation of resources does violence to the entire economic system."
Entire commentary viewable here.