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ok....what caused the destruction of excess debt and what is excess debt, I mean how do we measure it, assuming it exists? Just asking.
There are a number of ways to measure excess det - maybe a better term for it is "dangerous debt" as the owner tends to be more highly leveraged than others and the underlying collateral overpriced. Lending 100% LTV on assets whose prices are 2-3 standard deviations above the mean may be a good indicator. Covenent-light loans may be another. Debt to GDP is what Fisher used.
Problem is in neoclassical school (or blended) debt is considered in equalibrium when in the real world debt is (during credit frenzies like roaring 20s and current housing boom/bust) in disequalibrium. It is the disequalibrium that is the cause of the downturn.
This is why Bernanke et al have so much trouble understanding the role of debt and credit - their models assume equalibrium where there is none. Providing 0% bank loans is supposed to fix the problem - but the problem is no one who is solvent wants to borrow. The only real demand for loans is from those who are too high risk for the banks to gamble on. Disequalibrium again. Bernanke believed (in his Japan speech) that government can always cause an inflation to stop a debt-deflation recessionary event. I think his idea is bounded by the risk of hyperinflation on the top and aggregate demand loss of loans on the bottom. You can lead a horse to the trough but you can't make him borrow instead of save.
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Saying the markets dont clear is just another way of saying all correlations go to one and there is a liquidity problem. I mean if we can foresee this how do we stop it, if we cannot foresee it, we got an issue.
Not really. When a lender holds a $500,000 asset he lent as 100% LTV and that asset defaults while the underlying collateral devalues to $300,000, it is not a liquqidity problem for the bank but a solvency problem - especially when they have only $5000 in loan loss reserves.
Of course, if debt and repayment were in equalibrium this could not happen - which is a real problem with determining bubbles, i.e., if your theories don't accept that disequalibrium occurs how can there be a bubble?
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Let me put this another way, we dont know what causes recessions and we cannot predict them with any degree of certainty but recessions cause many of these issues.
Recession has been explained as a normal part of the business cycle. The present catastrophe and the Great Depression along with Japan's lost decade are not normal recessions but the result of debt-deflation recessions - IMO and that of Irving Fisher. Excessive debt was the cause. Disequalibrium.
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the good news is we seem to know how to get out of recessions, low taxes, fed floods banking system, free trade, etc.
World War seems the best method to escape debt-deflation recessions.