In almost all recessions (the 1970's slow down may be the only exception to this) there occurs some loss of confidence either demand or supply side, one will follow the other though. This can be due to a sudden market shock like an oil crises, or a speculative bubble in a particularly large market sector (Housing, debt, Gold reserves?) it varies but these bubbles are often caused by a lack of fiscal control: the central bank doesn't tighten interest rates or currency values to stop speculation running wild. (There is more nuance to this, but keep in mind that there were no world wide recessions from 1950 to 1972 and 1972 could well have been down to a supply shock in oil). Now businesses being very good and not wanting to go out of business generally cut back on their Labour force and shrink their scope of operations, if this was in stable period this would make perfect sense, but when everyone is dealing with a slower rate of transfer in money and all business reigns in their work, then this leads to higher unemployment, which it turn leads to less spending power due to people being out of work but also a bigger desire to save among the remaining workforce who now feel the pinch of job insecurity.
But then many people will say: 'But if more people are saving and the government reduces its bond usage then the banks can lend at cheaper rates to business and we can get things moving again.' Wrong i say! Because if the economy is not growing then there is to great a risk, investment in business is only smart when you can be sure that a company is going to expand and pay you dividends! Rather what these banks will do is put their money into government bonds which have increased in number due to smaller tax receipts and larger numbers of the unemployed. Then they will say 'Ah but don't you see? The government is crowding out the market with its bonds, also if you keep on at this then eventually the rates on those bonds will rise and you will be in a trap of putting more and more money into servicing the debt, crowding out the market and leading to a self fulfilling prophecy of stagnant growth and ever growing debt. We have no money so you can't create it out of thin air, that inflationary!' AHAH you fools! I say, because you have just fallen into the trap! Well not a trap, more a cheap way of me continuing this dialogue, but still. Firstly we are not printing money in this situation, we are issuing bonds, which although inflationary at times in a normal economic cycle does not have the same effect in a liquidity trap. This is because we are not as a whole poor on money, private groups just don't want to put it in business with no expectation for growth. So yes they put it into bonds which will stay at very low rates until growth picks up, don't believe me? Look at the rates for low yield interest bonds after the S&P's downgrade on America, their bond rates went down even more. Basically the downgrade had no impact on the bonds, in fact but correlation they improved it (obviously not).
So then what about Austerity? You could argue that if they weren't putting it into bonds they would be investing it in the next big thing right? I mean, banks do need to promise returns to those billionaire investors right? Well what happens then is generally they just put the money into hard products that are price stable like Gold, which has been increasing in value since like, ever. This won't do any good for anyone really, its just a way of securing your goods in some kind of hard commodity instead.
The government on the other hand can have almost permanently low bond rates and can use this to fund a recovery. Putting people into any kind of work will help to fill the spare capacity of an economy and while at its worst this can just be pushing the money around without adding much at all to it - Like making two men do a task one could do, the old ditch digger scenario. This will at least ease long term social fears brought on by unemployment and create a greater sense of confidence in the market as rates of consumption increase. Fortunately there are usually a shit tonne of things we can do with state money - rebuilding old infrastructure, investing in green energies, investing in high speed broadband, we could even revitalize some segments of our industry by offering low interest, or even no interest rates to companies to build or run factories in the country which could really modernize to stay ahead of outsourced wages.
The whole point is that there is a need to get confidence up, but this is not done by showing off to the markets on how fiscally disciplined we are, the only occasion that may have been true for is Greece but this is a country with an average of $44,000 of debt per head where the average GDP is about $10,000 per head and rife with all sorts of other problems unlike any other developed country that has had issues with growth. What our problem is, is we have (as in, the private sector of the country.) a lot of money but very little room to circulate it. No company is going to act, there is no company large enough whose actions would kick start the whole economy and nor would we want it to. Currently only government has large enough weight behind it to really kick start anything here, it needs to use those private funds now to bring the economy into action once more.