Mark Thoma has a good piece up on at the Fiscal Times about why the particular causes of this recession have led to a slow recovery:
Recessions can occur for a variety of reasons. For example, oil price shocks, stock market crashes, housing bubbles, monetary shocks, and productivity shocks can all lead to economic downturns….
..One way to distinguish recessions is through differences in their effects on balance sheets, in particular those of households and banks. For households, the collapse of a housing bubble, which also tends to cause a stock market crash, results in a decline in home equity as well as the loss of retirement and education savings. When combined with the loss of jobs due to the recession, and the fact the debts do not decline with the fall in asset values, the effect on balance sheets can be devastating – much larger than, say, the balance sheet impact of an oil price shock. Households have no choice but to set aside part of their income to both rebuild the asset side of the balance sheet and to pay down their debts.
Monetary policy can help us recover in a recession like this by increasing nominal asset and income values relative to average debt, some portion of which is nominally fixed. But cleaning up household balance sheets while unemployment remains high is difficult.
I don’t see any good way to do this, but as Mark points out banks have repaired their balance sheets, and if there was a good way for some of that wealth to be transferred to households with poor balance sheets I think it would help the recovery. The only thing that comes close to that is mortgage cramdowns, which I am not optimistic could be done without lots of unintended consequences. My secret hope was that the foreclosure fraud debacle would provide a way to transfer wealth from banks to underwater homeowners that would be consistent with a fair interpretation of existing laws, and wouldn’t represent an ad hoc transfer of wealth that would undermine banks future willingness to lend.