I thought it would be good to give just a 2-minute, off-the-cuff sketch of Where We Are, without many explanations (see previous posts for these). Just a quick bunch of thoughts.
After a 30-year, massive credit/debt boom aided by advertising, the ratio of American household indebtedness vs. income rose to levels similar to the peak in 1932 , and even doubled vs. incomes over 30 years. When the last easy-money extreme -- NINJA loans -- finally faltered, the bubble of credit began to reverse in late 2007, and house prices began their downward return towards normal. In response, people are trying to save for retirement since their houses and stocks are worth considerably less.
The change in consumer spending is likely to be semi-permanent (lasting, and only partially reversing), and that's for the people who have jobs. Meanwhile, jobs servicing the artificially high demand of the credit-bubble times are being lost, and that will be huge.
Rogoff and Reinhart's study of past financial bubbles shows it's likely that house prices will continue down for years more, and jobs losses are likely for years. The average GDP decline after such busts is 9%.
The Fed is acting more aggressively than ever before, yet how can extra credit availability matter when people everywhere simply choose to save? Consumers choose to save regardless, and businesses will choose to be conservative regardless of credit availability, since we all see the same reality. One way the Fed can do something meaningful is to manage to get mortgage rates under 5% and hold them there for a long time, thus freeing up more discretionary spending for many households after they refinance.
In short, one necessity to help prevent a Long Slump (near Depression-like) that lasts more than 3 years is by somehow creating effective incentives to start new kinds of industry and business to produce new kinds of products and services that people want and do not already have.
Obama may realize this in part, but it's not yet clear how well.
That's where we are.
(Extra note: The Administration and Congress should not lowball the incentives for new business and job creation when they legislate. There is a tendency to work on the margin (for instance Obama's 2008 idea of a $3000 tax credit for new jobs). We will need something much more powerful, such as a 20% subsidy in the first year on the first $1 million of domestic investment and/or payroll increases that create jobs on net, paid a year later based on payroll continuation, and the percentage attenuating over 3 years, for instance. It's not at all hard to set up rules to prevent substitutions or other abuse of such a subsidy. I could do it in an hour, and so could many experienced businesspeople.)