By this time during the Great Depression of the 1930s the bad debt had been dealt with and was no longer a millstone around the neck of the economy.
To me, the trouble with Stiglitz's arguments, and to a much greater extent the trouble with people like Krugman is that they are starting from a from a more orthodox economic analysis than even Summers. In actuality, the banks do have a gun to the head of the world governments and the difference between banana republics and Ireland or UK and USA in this case is not so great. If you begin from the position that the banks have captured decisive political control over the last 20 years, then the naivete of the idea that "governments" should just put their feet down and let "the market" clean up, becomes more apparent.
Contrary to conventional wisdom, Summers has been articulating a more "radical" critique of the banking system than Krugman, and perhaps than Stiglitz.
Larry Summers has been consistently making a similar claim: he argues that the banking system in the US has averaged a major collapse requiring government bailout every 3 years since the 1970s and that this indicates systemic trouble.
http://agonist.org/sean_paul_kelley/20091016/a_crisis_every_three_years
