When the mortgage bubble exploded, and the economy was sent into a tailspin, the more intelligent commentators had a plan for hastening the recovery: a big stimulus program, preferably aimed at fixing some of our country’s ancient infrastructure, and mortgage cramdown to take the sting out of the bubble collapse for homeowners. What we got was a stimulus that was too small to affect the economy much, and an incredibly ineffective program known as HAMP. As a result, the economy is stalling, and the Fed is essentially giving up: growth will be lackluster, and perhaps the unemployment rate will drift back down to normal levels by 2014, 2015, 2016…
In Greece, which is also in full meltdown mode, the sanest, most humane outcome for the Greek people would be a default on Greek bonds. Painful in the short term, but better overall in the long term. Instead, we get round after round of austerity that is supposed to improve the economy, but instead is leading to a potential death spiral. The latest idea is selling off state assets, which I guess makes sense in a perverse way: if your house is on fire and you manage to sell off the bedroom and kitchen, you can say that you now have fewer things on fire, and so you’re improving!
In both instances, the rational choices were not taken, both for ideological reasons and because it meant that the banksters would have to lose some money (the fact that at least in the U.S. there were no strong voices actively pushing for things like cramdown was also a huge problem). What’s good for the people in general isn’t what’s important; what’s important is what is best for those who already have most of the money.
As for the current deal-making on the federal deficit, the easy thing to do would be to let the Bush tax cuts expire (and winding down the wars in Afghanistan and Iraq won’t hurt either). Thus, we will end up doing anything but that. It’s only reasonable!