Some numbers here are important. Seekingalpha.com has a graph of total private and public debt. Total credit in the US economy is 3.6 time the GDP. This is roughly twice what it was under Bill Clinton. The peak of Clinton years was rougly 1.8 a little among the maximal peak during the great depression. This is a difference from 1.8 times the GDP. The current debt level is unsustainable. With the redistribution of income upwards taking place since Reagan and the US Gini coefficient .49 neck and Neck with the Ivory coast and far out of the range of the Western World, this is bound to happen. This number scales from zero to 1 and the World Maximum is .7. It .1967 it was .38 high but in the European range, Sweden now is .26 for example. Public Debt us .6 GDP not good but

In the current climate this was inevitable. As the economy contracts more will default on their debt. As more of the public fails to pay the rich investors who had too much capital accumulated and too little ability to invest will themselves find their assets devalued and default on the levered debt. As Marriner Eccles mentioned in his memoires if the public lacks the wealth to buy the Goods and services produced by the economy then a deflationary spiral eventually becomes inevitable. More lending by large institutions to the consumer will simply at best postpone the problem.

So what can we do to avert a Depressionary Spiral? The plan should be to replace Debt by Equity. The real good news is this is deflationary, a hyperinflation which could equally well happen is a danger which is much more difficult to deal with. In a deflationary environment the government which has leeway. On the Monetary side the interest rate card has already been played. In any event cheap and plentiful credit will do no good if there is nobody at the base of the chain to buy it. This is what happened in the 1930s and will likely happen now.

There is very good news here because with understanding their is much the state can do. First off It can enforce this massive revaluation in the market. Let the creditors loose their shirts as much as possible without having the Chinese sell off us Debt and turn the United States into Argentina.

Second it can buy up much of the excessive debt at the base of the food chain, i.e. Credit Card Debt, mortgages ... etc. With debt in hand the repayments can be adjusted down 50% and relatively generous terms can be enforced by forcing heavy penalties on the assumption of new debt by people who cannot afford it.

Third, as the market has done a damn poor job recently in investing in useful goods and services. The state has given us the internet, air plane technology, drugs, advances in ultrasound, the microprocessor, and other things through direct research, investmaent in labs and other thngs. Its time we let them make large investments and spin them off to alternative energy.

Fifth at this point even Martin Feldstein, Reagan\'s chairman of the council recommends a large investment in infractructure. Its about time we do this.  If we want an advanced American economy its what is necessary.

This will be a long post. I think there is a lot of fuss about details and not to the point as to causation and cures. Here is the quote from Marriner Eccles as to how income inequality leads to Depression.  Marriner Eccles was a very famous architect of the New Deal and Roosevelts appointed Chariman of the Federal Reserve.

This is a quote from Marriner Eccles the wealth distribution in the US is comparable to the Ivory Coast. Truly a disaster waiting to happen in a country with civil liberties and a free press. Looking at  http://seekingalpha.com/article/...ming- depression . To see what happened to private debt under Bush.   Briefly it went from 175% of GDP to 350% in 8 years something no government or society in this country did ever before.  To understand

Here is a His quote, this is discussion which is absent from todays talk.
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As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation\'s economic machinery. [Emphasis in original.]

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers\' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

Current levels of debt have risen under Bush from a little under the peak of the Great Depression to 350 x GDP. Even with lax credit standards, government support what the current crisis says is that private levels of Debt are unsustainable. Public levels are not nearly at anything like this level though, its the private Debt which is way out of line both historically and with American Standards.
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Markets do two things to deal with debt bubbles if uncontrolled Weimer Germany had hyperinflation and we had Depression. Note that people should be focusing on the aggregate levels of debt and the relatively high interest rates the public pays as compared to say Japan not the proximate misregulation which caused the immediate crisis. Robert Frank showed how a kind of trickle down leads to insatiable demand for debt amongst the people who have less money.

We need to do two things, none of which is popular in the Fragmented US society which tolerates poverty well politically if it doesn\'t result in massive social unrest. First revoke the Reagan Tax cuts. Secondly, have massive government investment in productive enterprise, jobs, education, and infrastructure. Alternative energy is a good investment in the long term for sure but whether or not is best at the moment remains to be seen.  Economists on the right will not agree with the necessity for higher taxes on the wealthy but even Martin Feldstein is in favor of a stimulus package.  Its funny how massive potential deflation  makes "socialists" of right wing economists.
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Should massive hyperinflation occur, a possibility. We would need to try to enforce a Bretton Woods type agreement. Such might be impossible in todays world.  However, it would be all to the good.  Nixon\'s unilateral abolition of Bretton Woods was probably the worst thing in retrospect he did in his administration although this is of course arguable.