The debates miss the point that debtors still have too much debt and aren't able to service it. Until the debt is written down and restructured, credit growth may not resume.

In the TARP Oversight Panel Report, Professor Elizabeth Warren observed:

"Six months into the existence of TARP, evidence of success or failure is mixed. One key assumption that underlies Treasury’s … approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from non-functioning markets for troubled assets. On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth."

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At best, the tsunami of government debt may crowd out other borrowers, exacerbating existing financing problems. At worst, there is a risk of a collapse of the growing "bubble" in government debt markets as investors refuse to purchase debt at current rates triggering additional losses. In 2009, long-term interest rates moved up sharply as markets started to absorb the import of government initiatives. As James Carville once noted: "I want to come back as the bond market. You can intimidate everybody."

Current initiatives resemble the "hair of the dog that bit you" cure: Though our problems can be traced to high levels of debt accumulated by banks, consumers, and companies, we're attempting to cure them with more debt -- that taken on by the government. Simultaneously, the debt-fueled consumption of consumers and companies is being replaced by debt-funded government expenditure.

Adjustment in the level of debt and asset prices is part of process of through which the global economic system reestablishes itself. Governments and central banks can smooth the transition but they cannot prevent the necessary adjustments taking place. Like King Canute, central bankers and finance ministers cannot hold back the tide.

Living on a Prayer

Like an athlete using drugs to enhance performance, the global economy used debt and financial engineering to enhance global growth. Increasing stimulus was needed to maintain performance in an unsustainable Ponzi scheme. The removal of performance- enhancing drugs has exposed fundamental weaknesses.