The Christian Science Monitor has a "Cover Story" feature, 5 lessons of the Great Recession, which unfortunately does not include a reader comments section, so I am posting my comment on it here:
The key paragraph of this analysis:
"This ethos [of credit] got pushed to its limit in the housing market in the early 2000s. Credit was extended far beyond prudent standards, resulting in a boom-and-bust cycle that, in turn, helped trigger a wider crisis. In the process, the credit bubble symbolized a broader lesson that history teaches again and again: The very financial system that helps to fuel growth in good times is also a source of big risk to the wider economy."
It is the burden of household debt that retards economic recovery. Although it is really more a political issue than a fiscal one, government debt is also preventing helpful fiscal stimulus. The debt of banks, other financial institutions and some industrial companies with major financial exposure has been less of a further problem than it might have been only because of the bailouts.
How did there get to be so much troublesome debt? Was it just "ethos" -- a kind of social madness? Perhaps to some extent but I think most of it is traceable to the nature of our money. The public is vaguely aware that we some time ago abandoned the gold standard -- the last link to gold being cut during the Nixon Administration. The public noticed little change, continuing to use green colored pieces of paper for money just as before. Few understand just how fundamentally different, for better or worse, the new money is from what it once was. It isn't really only since the 2008 crash that we have been "in uncharted territory".
Under the old gold, (actually "bi-metal"), exchange standard the government would acquire gold or silver through taxes or purchases and issue paper certificates redeemable in the precious metal so acquired. The way the Federal Reserve today issues new money, primarily as bank account credits, is through buying government debt. Debt is the asset that backs our money essentially as it used to be backed by precious metal. The new money appears in the reserve accounts of "primary dealer" banks who use it as fractional reserves against which to write loans, including loans to other banks, creating even more money. It is debt backed by debt. In fact, by lending reserves around, banks create as much money as there is loan demand which they care to supply. The Federal Reserve does not control the amount of this debt backed money. It does not even try. It instead tries to control interest rates as a means of preventing rapid price inflation and also as a means of monetary stimulus -- stimulus which has only a weak "pushing on a string" effect when demand for credit is very low as it is at present.
Making debt, a.k.a., credit, rather than metal the base of our money and permitting the demand for money to control its supply, our current monetary system causes credit "bubbles" from which recovery is difficult. Banks do not make profits simply on the margin between the interest rates they charge and the interest rates they pay. They use leverage, the use of debt to finance much more debt, to greatly magnify their profits. If the debt based money system is to be sustainable leverage must be much more constrained than it has been. Banks naturally oppose this. I have practically no confidence that government regulators are able to achieve this aim by successfully resisting banker pressure and preventing creative use of loopholes.