Two variants of financial crisis continue to wreakhavoc on Western economies, fueling joblessness and poverty: the onethat we read about regularly in newspapers, involving governments around theworld; and a less visible one at the level of small andmedium-size businesses and households. Until both are addressedproperly, the West will remain burdened by sluggish growth, persistently highunemployment, and excessive income and wealth inequality.

The sovereign-debt crisis is well known. In order to avert a likely depression, governments around theworld engaged in fiscal and monetary stimulus in the midst of the globalfinancial crisis. They succeeded in offsetting nastyeconomic dislocations caused by private-sectordeleveraging, but at the cost of encumbering theirfiscal balances and their central banks’ balance sheets.

While sovereign credit quality has deterioratedvirtually across the board, and will most probably continue to do so, theimplications for individual countries vary. Some Western countries – such asGreece – had fragile government accounts from the outset and tipped quickly into persistent crisis mode. There theyremain, still failing to provide citizens with a light at the end of whatalready has been a long tunnel.

Other countries had been fiscally responsible, but were overwhelmed by theliabilities that they had assumed from others (for example, Ireland’sirresponsible banks sank their budget). Still others, including the UnitedStates, faced no immediate threat but failed to make progress on longer-termissues. A few, like Germany, had built deep economic and financialresilience through years of fiscal discipline and structural reforms.

It is not surprising that policy approaches have also varied. Indeed, theyhave shared only one, albeit crucial (and disappointing) feature: the inabilityto rely on rapid growth as the “safest” way todeleverage an over-indebted economy.

Greece essentially defaulted on some obligations. Ireland opted forausterity and reforms, as has the United Kingdom. The US is graduallytransferring resources from creditors to debtors through financial repression. And Germany is slowly acquiescing to a prudent relative expansion indomestic demand.

So much for the sovereign-debt crisis, which, given its national,regional, and global impact, has been particularly well covered. After all,sovereigns are called that because they have the power to impose taxes,regulations, and, at the extreme, confiscation.

But the other credit crisis is equally consequential,and receives much less attention, even as it erodes societies’ integrity,productive capabilities, and ability to maintain living standards (particularlyfor the least fortunate). I know of very few Western countries where small andmedium-size companies, as well as middle-income households and those of morelimited means, have not experienced a significant decline in their access tocredit – not just new financing, but also the ability to roll over old credit lines and loans.

The immediate causes are well known. They range from subdued bank lending to unusually high risk aversion, and from discredited credit vehicles to the withdrawal of some institutions from credit intermediation altogether.

Such credit constraints are one reason why unemployment rates continue torise in so many countries – often from already alarming levels, such as 25% in Greece and Spain (where youth unemploymentis above 50%) – and why unemployment remains unusually high in countries likethe US (albeit it at a much lower level). This is not just a matter of lostcapabilities and rising poverty; persistently high unemployment also leads to socialunrest, erosion of trust in political leaders and institutions, and themounting risk of a lost generation.

Indeed, unemployment data in many advanced countries are dominated bylong-term joblessness (usually defined as six months or more). Skill erosionbecomes a problem for those with prior work experience, while unsuccessfulfirst-time entrants into the labor force are not just unemployed, but riskbecoming unemployable.

Governments are doing too little to address the private credit debacle. Arguably, they must first sort out the sovereign side of the crisis; but it isnot clear that most officials even have a comprehensive plan.

Policy asymmetry is greatest for the countries most acutely affected bythe sovereign-debt crisis. There, the private sector has essentially been leftto fend for itself; and most households andcompanies are struggling, thus fueling continued economic implosion.

Other countries appear to have adopted a “Field of Dreams” – also known as“build it and they will come” – approach to private credit markets, In the US,for example, artificially low interest rates for home mortgages, resulting fromthe Federal Reserve’s policy activism, are supposed to kick-startprudent financing. The European Central Bank is taking a similarly indirectapproach.

In both places, other policymaking entities, with much better tools attheir disposal, appear either unwilling or unable to play their part. As such,action by central banks will repeatedly fail to gain sufficient traction.

In fact, only the UK is visibly opting for a more coordinated and directway to counter the persistent shortfalls stemming from the private part of thecredit crisis. There, the “Funding for Lending Scheme,” jointly designed bythe Bank of England and the Treasury, seeks “to boost the incentive for banksand building societies to lend to UK households and non-financial companies,”while holding them accountable for proper behavior.

The UK example is important; but, given the scope and scale of thechallenges, the proposal is a relatively modest one. The program may stimulatesome productive credit intermediation, but itwill not make a significant dent in what willremain one of the major obstacles to robust economic recovery.

Proper access to credit for productive segments is an integral part of awell-functioning economy. Without it, growth falters,job creation is insufficient, and widening income and wealth inequalityundermines the social fabric. That is why any comprehensive approach torestoring the advanced countries’ economic and financial vibrancy must target the proper revival of privatecredit flows.