With the U.S. economy in a recession, Clinton said President-elect Barack Obama must also shore up plummeting property values.
"The big risk now for America and the world is deflation, contraction, dropping asset prices. We have to stimulate the economy which means in the short run, he has to take America into even more debt. There is no alternative," Clinton said at a lecture organized by the Sekhar Foundation, a philanthropic group that aims to foster an understanding of different cultures.
Obama "has to put a floor under the asset values and then use the government's spending ability to trigger economic activities," Clinton said. "Then when we resume growth, we should adopt a more conservative and traditional budget policy."
The U.S. has not suffered through a prolonged bout of deflation since the Great Depression of the 1930s. Congress passed a $700 billion bailout fund for financial institutions to combat the economic crisis.
Obama, who takes office Jan. 20, has called for a massive economic recovery bill to generate 2.5 million jobs during his first two years in office.