I think I agree with you and am not sure where the disagreement is. Save possibly two points:
(1) Limiting debt issuance would only be expansionary if it didn't imply a reduction in government spending. And financing growth by expanding the money supply is a perfectly acceptable Keynesian solution. If this led to inflation and rising interest rates that would suggest the economy is no longer in a liquidity trap and the Fed could step in to rein in inflation while the government could go back to raising money on the bond markets.
(2) I'm under the impression that US banks reduced lending following the 2008 bailout. I seem to remember Andrew Ross Sorkin making this case, but either way - I don't think the best solution to the present crisis is a 20 year process of watching the banking sector delever as in Japan! Better to have controlled failures to wipe out debt and reduce moral hazard while making sure the economy is primed with the demand to deal with the fallout. How exactly to do that is a good question.
I mean I think there's no such thing as a liquidity trap, so I believe we disagree on that at least.
Regarding your point #2, yes I agree. But bailing banks out is exactly what Japan did. The certainty of regulatory capture by banks makes it better to just remove the government ability to bail them out. Let them fail. A moderate approach would be to limit bank mergers - too big to fail is too big.
Asserting that an economy is in a liquidity trap is equivalent to asserting that increasing the money supply will not drive up inflation or interest rates in the short term, but will drive employment and GDP growth.
I don't think it makes sense to argue that this situation is not theoretically possible since it appears to describe reality quite well. That said, the policy commitment that comes out of accepting even the possibility that we may be in a liquidity trap should be uncontroversial regardless of whether you believe the model is a close approximation of reality or not: push aggregate demand until there is some evidence it is driving up inflation and interest rates, at which point the theory says to stop because more of the same won't do any better.
(1) Limiting debt issuance would only be expansionary if it didn't imply a reduction in government spending. And financing growth by expanding the money supply is a perfectly acceptable Keynesian solution. If this led to inflation and rising interest rates that would suggest the economy is no longer in a liquidity trap and the Fed could step in to rein in inflation while the government could go back to raising money on the bond markets.
(2) I'm under the impression that US banks reduced lending following the 2008 bailout. I seem to remember Andrew Ross Sorkin making this case, but either way - I don't think the best solution to the present crisis is a 20 year process of watching the banking sector delever as in Japan! Better to have controlled failures to wipe out debt and reduce moral hazard while making sure the economy is primed with the demand to deal with the fallout. How exactly to do that is a good question.