Economic Crisis - Have we even defined the problem right?

My Basic Education was in Mechanical / Industrial Engineering with some focus in Operations Research. I still remember the first thing my Professor said way back. 95% of the solving the problem is about "Defining the problem right" remaining 5% is about "applying the right algorithm".

Off late, as I have been questioning whether we have even defined the problem right?

Looks like the root cause economic problem is defined as "Lack of Lending" or "Lack of Credit Flowing"?

So the solutions to the problem range from Re-capitalization to Closing Banks. The current govt solutions are trying to meet in the middle with plans like public-private partnership etc etc as noted in Prof. Brandl's Blog today - http://blogs.mccombs.utexas.edu/brandl/2009/03/25/geithner/

So I took the liberty to comment on the blog entry, the essence of which is as follows

1. If we truly believe there are good well run banks in the mix - then why are they not lending and why are we focussing on the so called large insolvent banks? With interest rates close to 0% the good ones should be able to borrow and lend infinetly? ( Net - Net - It should really not matter if the insolvent ones do not !)
2. Lend to whom ? The american consumer is so much in debt. When was the last time any bank lent to the person who has maxed out his borrowing capability or does not have a job? Would you, if you were running a bank lend to a consumer profile who is already saddled with debt he cannot pay?
3. Assuming, we are successful in re-capitalizing the banks. The banks will naturally try to find the most credit worthy and profitable consumer profile to lend to. Are we really sure that, THAT consumer profile is really the American Consumer ? If not, Question who this consumer is and will money start flowing to that consumer?

As I think thru this subject, I really, would like some economists to illustrate which credit worthy institution / individual is not able to borrow ? and if there is such an example, I would like to further understand why the so called well run banks are not lending to them ? That may shed light on what the real problem is?

So what is My Take: My Gut tells me that the real problem, America now faces is not availability of credit, it is credit worthiness of American Consumer. So the solutions should make American Consumer Strong and Credit Worthy Again.

In the short run this may be best acheived by letting the American Consumer - The individual who is acutally working 8 hrs a day and makes a salary around the national average keep more of his money and " by American Consumer I do not mean American Businesses or citizens who make say more than 2x of national average". The mid-term solutions lie in executing national projects like upgrading National Infrastructure - Highway Systems, Air traffic Control Systems, Power Grids etc and The longer-term solutions lie investing into education, re-training, and providing funding future technologies - Energy Independence, Regulatory Frameworks, Tax-Code re-write etc.

Finally, we cannot ignore the psychology of markets, we have to recognize that as long as every one, which includes banks feel that there will be a better opportunity (option) in future they will stay out which will make things worse. John Maynard Keynes recognized this way back, so long as government in this case keeps the hope that more help is one the way to the banks, it will stall the recovery.

Thank you for reading. Your feedback is appreciated.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.