Wouldn't people paying off debt be the same thing as helping fix the credit problem?
Nope, the core of the credit problem is intra bank (between banks). They dont want to loan each other money because they can not or do not want to value their toxic assets. The toxic assets arise because of falling house prices (which were frankly way inflated), and as long as house prices are falling, then the more toxic assets will come and the banks will continue to not loan each other money. And as long as banks dont want to loan to each other, then forget about companies and people getting credit.
Getting a tax cut that will be used to pay off debt or save up, wont do squat. Sure it might help VISA and Mastercard since that is the debt that will most likely be paid off, but on the flip side, both companies and other CC companies will just cut your credit line drasticlly if you do that.
Tax cuts will not pay off mortgages and that is where the huge majority of the toxic debt is tied too. After all the problem arised when American's got more and more loans in houses that had inflated prices, prices that are now falling so that American's owe more in their house than it is worth.... and that is the crux of the toxic assets and why it is so hard to value them. That and because of lack of regulation and rules, banks and the markets "mixed" toxic debt with good debt and no one has a clear view over what is what.. hence all debt is potentially toxic, and no one can trust the valuation that the debt was bought on.
I think what politicians are looking for are near instant results. The positive changes take time and can not be wished into existence like so many of them think will happen.
Only the stupid politicians are looking for that.. The pain will be here for months if not years to come, even Obama has said so many times. And any politician that even hints that tax cuts or any form of stimulus will "work instantly" should be removed from his position for incompetence.
The problem is that the US politicians and somewhat the UK and other European politicians are not willing to go against their ideological conservative free market principles, that have so clearly failed.
The US should do as the Swedes did, when they went through exactly the same problem back in the early 1990s. Nationalise banks that are failing, consolidate and improve and then sell off. One of the healthiest banks in the world today is Nordea, an entity of nationalised Swedish banks that since hence have been privatised and has emerged as a juggernaut in banking in Scandinavia and Northern Europe. It was painful but it worked, but it also goes against the "conservative mindset", which is the US biggest problem at the moment.
Basicly we need to cut off the foot to save the life of the patient.