The world is in the grip of a credit crunch. As economic slowdowns hit around the world — already Japan and parts of Europe are formally in recession, and the conventional wisdom is that the United States is either in the same boat or not too far behind - the amount of available money is drying up. Compounding, and to some degree triggering, the problem are the mounds of subprime assets forcing banks to adjust their balance sheets to the degree that the bulk of major Wall Street institutions have crumbled under the strain. The net effect is that a reduced pool of capital is being hoarded. That is driving up the cost for any type of borrowing, with many of the more speculative projects or borrowers simply being unable to attract money at all. Credit crunches almost invariably trigger recessions (assuming recessions are not in effect already) because they greatly degrade the ability of firms, individuals and governments alike to engage in economic activity.

In time, this will work through the system, as in the many recessions of the past. For some time, credit will be extended only to obviously profitable ventures and to deeply qualified borrowers, while questionable firms are crunched out of business. As efficiency improves, lenders will become more willing to extend credit to less-than-sure things. And a recovery will be under way.

Between now and then, governments will do what they can to lessen the impact of the credit crunch. Some will enact bailouts — or even nationalizations — of banks to ensure there is as little of a crunch as possible. Others — think the United States — are looking to simply take the questionable subprime assets out of the equation altogether so that the reasons for the credit crunch disappear. Ultimately, mitigating the effects of a credit crunch comes down to how much a government is able to tinker with finances; fighting off a credit crunch ultimately requires money — and not a small amount of it.

That means that there are three leading criteria to consider.

First, there is the degree to which the government already dominates the economy. Governments tend to not be for-profit institutions, so issues of creditworthiness or low demand do not, as a rule, force them out of business. That means that any slowdown hits the private sector disproportionately — and the more resources the government absorbs, the fewer resources the private sector has to cope (in comparison, the government sector tends to just glide on). This factor is far more important in developed countries, where the state is strong and present throughout society, than in developing countries, where often broad swathes of territory — even economic sectors — are beyond the government’s reach.

Second, there is the level that the state’s budget is already in the red. A key means of kick-starting growth — and certainly a key means of extending credit — is to spend money.