I'm going to take another crack at this topic. Do bad banks (and a bad financial system) reduce the effectiveness of fiscal and monetary policies in shifting the Aggregate Demand curve to the right? The answer matters, because if they do reduce the effectiveness of fiscal and monetary policy (a lot), then we need to fix the banks and financial system first. If not, then we shouldn't wait. Plus, using fiscal and monetary policy to shift the AD curve to the right might be one of the most effective ways to help fix banks and the financial system. The risk of deflation and depression is presumably one of the most important things making loans riskier.