Stimulate Demand for What?

Classical Keynesian economics says that when the public stops spending, creating a shortage of demand, the government should step in with massive public spending to get economic activity circulating again. As Paul Krugman demonstrates in his example of the baby-sitting co-op, hoarding behavior brings an economy to a halt but the expansion of money in circulation restores the system. To apply this to our economy, often times this can be accomplished by the Fed reducing the interest rate, making money easier to borrow. Right now the interest rate is effectively at zero, so we don't have this option. But if the government spends money, this can also have the same restorative effect.

Here's my question: the examples of the baby sitting co-op and of public works projects during the great depression were both cases where the underlying economy made some kind of sense. In the baby sitting co-op couples are trading baby sitting service, something that they all need. During the depression farmers were growing food and industry could create washing machines or electric power lines. Farmers wanted electricity and washing machines and were willing to trade food for them. Since the companies themselves did not need grain and eggs, they needed a functioning economy to make this exchange possible. But what about when you have an economy like today, which until recently was based on being able to sell a house for more than you bought it for, or being able to get food or a manufactured product at a cheap price in a foreign country and sell it in the U.S. for a little bit more after transporting it here using cheap oil?

Now demand is falling in our economy, but does it do us any good to restore it when we should not expect the housing market to return to the unsustainable pattern of the last few years, and when our import based retail economy is pretty much just another version of Newman and Kramer using the mail truck to drive bottles to Michigan where they got 5 cents more (surely you've seen this Seinfeld episode)?