If the bank lent them the money and assumed all of the risk then yes. But in that case then if the bank goes bankrupt too, that money will stay circulating.
Japan did all of the things that are being suggested now, cutting rates to nothing, and massive government borrowing to jump start the economy. But they wouldn’t just accept bankruptcies and write off the bad debt.
That's even worse. If the bank is out of business, then it can't make any loans at all. Almost every depression I know of was preceded by numerous bank failures.
Japan did all of the things that are being suggested now, cutting rates to nothing, and massive government borrowing to jump start the economy. But they wouldn’t just accept bankruptcies and write off the bad debt.
OK, now I know where you're coming from. Japanese banks couldn't make new loans because they didn't have the reserves, and that's because they were carrying too many non-performing loans. Anything that prevents banks from making loans is deflationary.