James Galbraith provides much-needed clarification of a point that has been obscured in the debate, if that's the right term, over the federal budget deficit at a time of recession.

And that is that when it comes to the economy, the government is more like a bank than a family household, in contrast to those who argue that the budget should be balanced at all times, and especially when times get tough. Even President Obama echoed that view in his State of the Union address when he said the government should "live within its means."

Yes, there's a risk that investors will require higher interest rates on Treasury debt if they worry that the government won't be able to pay it back because its expenses exceed its revenues, but there's no sign of that occurring now. Will it happen in the future? Even Ben Bernanke recently said that was unlikely unless Congress refused to allow the Treasury to issue more bonds.

And some of those who worry about foreign investors demanding higher rates are the same folks demanding that the Fed start raising rates to head off inflation.  So why is it a problem if Treasury borrowing and Fed policy were to achieve the same result?

But back to Galbraith's distinction: If you think of the government as another lender, and one that steps in when banks fail to lend, as they are now now, then you begin to understand what Uncle Sam's role is during a recession. That's why it's called a "lender of last resort." (Now some would argue that lending more to consumers already burdened with debt amounts to pushing on a string, but that's why the government may have to serve as an employer of last resort as well.)

The economist's key point is that without financing, either from the private or public sector, an economy cannot grow. That's as basic as it gets, folks. It's the very definition of capital investment. Yes, there are good loans and bad, but the source of them isn't the issue.Banks can be no more prudent about lending than the government is, as we've just seen. The main difference, as Galbraith notes, is that banks charge higher fees.

As for insolvency that may arise because of unfunded future obligations, that's just another way of describing a mismatch between the duration of their assets and that of their liabilities. Yes, neither a family nor a non-financial company can operate like that for long.

But banks can and do. It's what defines them as banks. Governments operate that way as well. The only question is how well banks and governments manage their asset-liability duration mismatch. And that's just another term for risk management.