| Abstract | According to the level of debt ratio, an economy can be distinguished in two situations: normal and abnormal state in debt. Under the normal state in debt, the debt has no feedback effect on the economy. Nevertheless, the economic operation has a feedback effect on the debt. That is, under certain condition, the debt can be accumulated continuously along with economic growth. This will make the economy shift from the normal to the abnormal state in debt. When the economy is under the abnormal state in debt, the high debt ratio begins to have a negative feedback effect on the economy, thus leading to the economic crisis. The economic crisis caused by the debt usually cannot be saved by conventional macroeconomic stabilization policy (or Keynesian demand management policy), only unconventional stabilization policy can rescue the economy in crisis. The so-called "unconventional stabilization policy" is essentially the government to pay, that is, the government pays the debt of companies or financial institutions. However, this policy may cause "time inconsistency" and "moral hazard" among other problems. Yet if the bailouts from government are necessary, it must be the "punitive bailouts" in order to avoid the "time inconsistency" and "moral hazard". For government, the “punitive bailouts” is the fundamental way to response to debt crisis. |