Why the economy sucks

I don't know or understand much about macroeconomics. But I have spent a lot of time the past couple of years reading stuff from people who do, and whereas I had no idea what was going on when the Lesser Depression started, I do feel like I understand the basic problem now.

The main reason unemployment is so bad right now is a lack of demand in our economy - there are less people buying things. Businesses will hire more people when they have more customers. There will not be more customers until people spend more money. But a big reason why people are spending less money is because they're unemployed. So it's hard to pull out of a deep recession because you get stuck in this catch-22. How can we increase total spending enough to start upward momentum in a case like this?

In milder recessions, we can get pulled out of that trap by the Fed lowering interest rates. Basically that makes it cheaper to borrow money, and people respond to that incentive by borrowing (and therefore spending) more. But there's a limit to how much you can lower interest rates because you can't make them lower than zero. With a big enough blow to our economy, that extra incentive to borrow isn't enough to counter-act the recession, which is the case we're in now where the Fed has held them as low as possible with no real recovery.

Why is it so hard right now to bring back consumer spending to start a full recovery? The big difference is that people are more in debt now compared to milder recessions we've gone through. Even if interest rates are lower or people get some extra money, they can't spend much until their debts are more manageable. But this isn't because of increased use of credit cards; the increase over time has been in mortgages:



When I was looking into buying a house before the recession, most of the "expert" advice was to buy the most expensive house you could afford. Basically, population is increasing, but the earth is not, so real estate "should" always increase in value. And your mortgage will continually get easier to pay, because you will eventually make more money, and inflation will effectively lower your mortgage payments. And if it worst comes to worst, you can always sell your house for a net profit. Both the people buying houses and the banks financing them were doing what seemed to be the smart long-term decision. But thanks to the housing bubble, up to 28% of homeowners now owe more on their mortgage than the actual value of their homes. With the recession's job losses and pay decreases, people have a harder time paying their mortgage, and because their house now has a lower value, they can't even sell it to get rid of the mortgage that they can no longer afford.

The issue of household debt will resolve itself eventually, but that would take a very long time. We can't start a meaningful recovery any time soon without reducing household debt and increasing consumer spending. The real question is: what are the realistic options for doing so, and what are their downsides?