The political choice is, Act now or wait and see. In terms of this three-pronged crisis prevention, only the Federal Reserve has shown any awareness of what may be required of it (revive the economy by reviving inflation), perhaps because the Fed's historic disgrace was its failure to act after 1929. Last fall, Fed governor Ben Bernanke reassured the worriers in a boldly stated speech: "The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost.... A determined government can always generate higher spending and hence positive inflation."

To underscore the commitment, Bernanke said the Fed is prepared to use unorthodox tools to expand the money supply if short-term interest rates (already close to zero) can be cut no further. Instead of buying only short-term Treasury notes to inject new money into the economy, the central bank may purchase long-term US bonds or foreign bonds. It may accept corporate debt, private bank loans and mortgage securities as collateral for the Fed's direct lending to banks--a way of pushing bankers to lend more generously to business. In fact, the Fed has far broader powers inherited from the Great Depression--the ability to make emergency loans to private businesses or state and local governments in extreme circumstances. But will the Fed act? Some financial insiders are not persuaded by the official statements. One told me that only three or four of the key decision makers on the nineteen-member Federal Open Market Committee take the deflation potential seriously--those who closely followed the slow-motion unwinding of Japan.

By comparison, the more visible fiscal debate in Congress is utterly out of sync with present reality, since both parties are dodging the "d word" and its implications. The White House, I am told, is deeply worried in private, but won't say so for fear of adding to the public's anxieties. The GOP's misdirected tax cutting does help modestly, putting money in motion by enlarging the federal deficits, but Bush is pursuing "trickledown" Keynes--help the wealthiest households get back their zest as consumers, and the rabble will surely follow. Democrats, on the other hand, are still playing the loser's role of Herbert Hoover and worrying obsessively about the rising deficits--wrong economics and bad politics too. Instead of fighting the last war, a clearheaded opposition would be leaning hard on the Fed and the White House for immediate preventive actions, advocating easy money, credit reform and aggressive public spending to restart the economic engine.

If things deteriorate further, who knows, the government's deficits may have to grow twice as large to become effective therapy. While the political climate is not yet ripe, forward-looking progressives should already be drawing up a grand list of spending projects--repairing the tattered infrastructure and launching innovative public investments that speak to the future. If the money builds real improvements for society, it will not be wasted, even if the Chicken Littles are wrong.

The third avenue for dealing with the potential crisis--reducing the mountainous debt burdens on families and businesses--is a far more controversial challenge and fraught with the potential for insider favoritism. Rescuing the big boys while allowing others to drown has been the conventional approach in recent decades, including the banking bailouts engineered by the Fed. But a lively political debate might inspire broader remedies that are both more equitable and more effective. Just as the S&L bailout fifteen years ago aided major financial players, government could create a "resolution trust corporation" for people--an agency that supervises debt workouts for households, gives them more time to catch up with mortgage and credit card payments, and imposes these relaxed terms on the financial industry, with government guarantees against failure. That would represent stimulus with a democratic bottom line. More likely, we will see one industrial sector after another line up for emergency bailouts, and the government, including the Fed, will pick winners and losers, defending politically influential elements of the status quo in the name of protecting the soundness of the system.

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