Banks aren't the only ones with balance sheets in need of recapitalization, household balance sheets also have big holes that need to be filled, and that will require an increase in household saving. The increase in household saving will cause household consumption to fall, but rather than trying to induce households to spend more - the opposite of what households need in the short-run and what the economy needs in the long-run - the government should accept that this is necessary, and perhaps even help with measures such as tax cuts targeted at households in danger of insolvency. At the same time, government spending should be increased sufficiently to compensate for the fall in household consumption that will occur as households repair the damage to their asset base:
Go Ahead and Save. Let the Government Spend, by Robert Frank, Commentary, NY Times: ...The role of consumers has had considerable attention ... because the economy desperately needs additional spending... But it is not ... the responsibility of middle-income families to provide that spending. If ... families want to ... pay down their bills or save a little more, concerns about the economy shouldn’t stop them.
Government is in a far better position to provide immediate economic stimulus. ... [E]ven by mortgaging itself to the hilt (as many families have indeed already done during the recent national spending spree), no family could spend enough to affect the current downturn.
Nor is it reasonable to demand that individual businesses pick up the slack, since most of them already have more capacity than they currently need. At moments like these, government is the only actor with both the motivation and the ability to jump-start the economy.
Passage of a robust stimulus bill has rightly been the Obama administration’s highest priority... As Keynes explained during the Great Depression, increased public spending would help end the downturn even if it were for useless activities like digging holes and filling them back up. It would obviously be better if the extra spending went for something useful. And as it happens, decades of infrastructure neglect, combined with huge state and local government budget shortfalls, provide more than enough valuable projects to put everyone back to work.
Bizarrely, however, some Congressional critics have denounced the administration’s stimulus proposals as “mere spending programs.” Of course they’re spending programs! More spending is exactly what we need. ...
It is unreasonable to ask families to spend more when government can stimulate the economy so much more efficiently. The financial health of the nation and the financial health of individual families are not conflicting goals. A family that wants to help put the economy back on its feet while increasing its own future standard of living should consider saving a little more or paying down debt. Those who want a tangible symbol of their patriotism can buy additional government bonds, which will help repair an extra bridge or hire an extra math teacher.