The result was debt-deflation. Falling asset prices tipped more and more households into insolvency, business stagnated, tax revenues dropped, states and localities cut their budgets and deficits widened. The situation is similar in Europe, with countries rather than households in the deepest trouble, and wild rumors attacking the shares of even the biggest banks.
Federal budget deficits in this situation are like IV-bags in an emergency room: they stabilize things. IV's are definitely linked to sickness, and no one would use them if they weren't necessary. But very few doctors propose to cut back on saline while the patient is still sick. Today, however, the official economists and their followers in Congress, the White House and the media are divided between those who would remove the IV's slowly, whether the patient recovers or not, and those who'd like to charge through the wards, yanking needles from arms. The debt deal enacted earlier this month put the first group in charge, but that's pretty cold comfort.