We are at a weird moment of mass hysteria among the governing classes. A different Democratic president might have challenged the deficit fixation and explained why it reflects backward economics, and gives up on the one sure means (deficit spending) the government has to stimulate the economy and aid millions in deep distress. Barack Obama instead goes along with the conservative fearmongering, promising to be more delicate in cutting people than Republican butchers would be.

What’s especially weird is the cross-dressing by the Federal Reserve. Normally the central bank acts as a conservative brake on big-spending politicians. This time the pols are playing fiscal scold while the Fed, virtually alone, has been trying to do something for the economy. Since last fall the central bank has pumped an additional $600 billion into the banking system, hoping this would stimulate lending and investment. On the whole, it didn’t work. The Fed’s balance sheet swelled to $1.3 trillion, but the new funding mostly sits idle as a huge surplus in bank reserves. Neither lenders nor borrowers have done much business with each other. The velocity of money—the rate at which the money supply turns over in transactions—is also slowing, a sure sign of sagging economic energies.

What the latest Fed infusion has mainly produced are some ominous new price bubbles in the stock market and in commodities like oil and copper. Remember how previous bubbles ended—in collapse, with sometimes violent consequences. This risk poses a new dilemma for the Fed. Its salvage efforts, known as “quantitative easing,” were widely criticized and misunderstood, so the Fed may just decide to let the program expire in June, as scheduled. Quantitative easing did not accomplish much for the real economy, but what happens when it ends? Most likely, stock markets will lose altitude, and commodity prices may fall too, assuming the dollar stops declining in value.

In a perverse way, bad news for Wall Street might turn into good news for the economy if—big if—it blows away Washington’s delusional obsession with budget deficits, and if it compels the Obama administration to drop its happy talk about recovery and refocus on economic stimulus. The president has been hostage to the Party of No, but he could gain respect and sympathy by trying to break the Republicans’ hold and do something to help people in need.

That shift sounds improbable, but veteran Wall Street forecaster A. Gary Shilling thinks events might lead politicians back to fiscal stimulus once they realize the economy is stuck in a long era of weak growth. Shilling thinks both left and right misunderstand the nature of the predicament and therefore argue over the wrong questions. Obama, for one, has governed on the assumption that the economy can promptly regain its old vigor if government does the right things. He assumed further that restoring the banks would lead inevitably to restoring the real economy. (Wrong on both.)

Shilling has a darker view. The United States has entered “the age of deleveraging,” as he titled his latest book. That means we’re in for a much longer and tougher slog, as people and businesses unwind their excesses and gradually absorb inescapable losses. Returning to long-accepted limits—or accepting that those limits have been lowered by massive losses of wealth and productive capabilities—is unavoidable, in Shilling’s view, regardless of what government does or fails to do.

“What it suggests to me is the economy is going to be sluggish, around 2 percent growth or less, through the next decade,” he explains. Politicians naturally resist that analysis, since it sounds bereft of hope. But Shilling makes an additional point that seems closer to liberal activism. The more rapid the adjustment, “the harder it is for people,” he argues. The foreclosure crisis is a scandalous example of his point; the Obama administration has never made a serious effort to intervene and reduce the wreckage, presumably because it thinks that would injure the banks or slow the pace of deleveraging. Shilling suggests that slowing this painful adjustment process is the right thing to do, not simply out of human sympathy but because it can limit the destruction. “If we accept that the economy is going to continue to deleverage until it returns to mean, then you would want that to take longer, because that would be less hard on people,” he says.

If Shilling is right, the country has a different policy choice to consider. Government intervention may or may not be sufficient to generate a robust recovery. But it can soften the blows of deleveraging without trying to evade inevitable costs. Helping people get through these hard times is good politics but also smarter economics. Without such an approach, the inequities will be grossly exaggerated, and Americans will be in for a very painful decade.