Why Aggregate Demand Targets Aren't Enough This Time
Traditionally, when the federal government battled a recession it had two main tools at its disposal, namely fiscal policy and monetary policy. You could reduce interest rates (monetary policy) and/or you could expand the money supply (fiscal expansion) (Akerlof, 86). When financial markets work, it is a straightforward task to stimulate aggregate demand using these two basic tools (Akerlof, 89). Unfortunately, because banks suddenly don't trust the system (and who can blame them) stimulating demand using these tools isn't working. Banks aren't making loans to business; they're keeping what funds they have on their balance sheets.
This time around the economy needs a greater boost than usual. Akerlof proposes a second target beyound aggregate demand, a target "for the amount of credit of different sorts that is to be granted. This target should correspond to the credit that would normally be given if the economy were at full employment. (Akerlof, 80)"
We all know why. Talk to any CEO and she will tell you that credit of any form is very tough to acquire. In order to book that new sale, a company needs to assure itself that it can actually produce what has been ordered and pay for the labor and materials related to the sale. Customers normally want terms for their sale, meaning, unless the company has funds to produce the order, the order isn't going to be produced unless someone supplies a credit line of some sort. Enter this new stimulus for credit.
For obvious reasons, banks pulled credit off the table. Interest rate reductions and increases in the money supply weren't enough to jumpstart the financial system, again. Enter federally provided (through non-traditional providers if need be) loans to reduce the credit crunch. Interest rate reductions and fiscal stimuli continue. Credit is added.
This is new. Some of the SBA lending guarantees currently available or discussed address part of the problem. So do guaranteed micro-loans (or not so micro loans). There may not be enough of them, but they are becoming available. If you need to leverage that new sale, look around for the funds. They are becoming more and more available.
Reference
Akerlof, Geroge A. and Robert J. Shiller. Animal Spirits. How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism. Princeton University Press. 2009.