Like it or not, restoring America’s short-run economic health will require spending. For instance, 2 million Americans are on course to lose their homes in the next year, which will further depress housing prices and lead to another wave of foreclosures. Weaknesses in the banking system will result in tightening credit, with cascading effects for the entire financial system and economy.

Some of what needs to be done does not require money. To stem the tide of foreclosures, we need a homeowners’ Chapter 11: a speedy restructuring of liabilities for poorer owners, modeled on relief for corporations that cannot meet their debt obligations. No one gains when owners are forced out of their homes; a house could be appraised and the owner’s debt written down. But to protect entire neighborhoods from blight, the government may need to buy some foreclosed properties. And it would be a crime to sacrifice such sorely needed assistance on the altar of fiscal prudence.

Beyond short-term difficulties, America’s economy is suffering from a longer-term underinvestment in infrastructure, and we’re losing our innovative edge in the global economy. So what’s this administration’s prescription? Tax rebates! Does it really make sense to encourage consumption in an economy with a zero savings rate? What we really need is more public spending on infrastructure, R&D, and education.

Wall Street’s insistence on deficit reduction is shortsighted. Ten years ago, the International Monetary Fund required deficit-reduction policies to ensure that American and European creditors would be repaid, even knowing that such policies would plunge East Asia into recession. The result was a contraction of Asian economies and a massive wave of defaults. And the lenders were never repaid.

Such a disaster could unfold today. If deficit hawks get their way, we risk making our economic contraction worse—and making the deficit larger than it would be if we did the right thing.

Joseph E. Stiglitz, a Nobel laureate in economics, is co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.