Why is there still a liquidity crisis?

What, precisely, is going on with the banks?

With all the money the government has pumped into banks via auctions and direct capital injections, why are they still worthless as organizations? The dollar is a viable currency. We are giving billions of these dollars to our banks. Why is this having minimal effect? Why aren't the banks yet lending money? Or are they?

Without a plausible answer to why the banks are in trouble even though they have all the money they need, thanks to the US government, any explanation of the current economic problems strikes me as hollow.

What have the banks done with all the money they've been given? Didn't they use it to pay down their debts? To the contrary, we still hear that the banks are bogged down in bad debt. What happened, then, to the TARP money?

I think there are at least three possible explanations why, despite the TARP money, the banks continue to face liquidity problems:

1. There is a 'confidence' crisis. In this case, the banks are better capitalized now, but maintain the bad assets on their balance sheets. As a result, despite the capital, there is little trust in lending to US consumers and other banks, at least until these assets are given a price. Moreover, for the same reasons, foreign lenders lack confidence in US markets. The pertinent questions become: When will these assets be given a price? How far will these bad assets come down? And will the prices by then be high enough to re-gain our credibility as borrowers? In this scenario, we should do the stimulus now, the TARP later after stimuls raises the prices of the securities.

2. There is a 'jobs/actual-wealth/actual-productivity' crisis. Nobody has the hard income or the physical wealth to sustain the borrowing that went on the past few years. We are significantly poorer as a result of de-leveraging, i.e. the marking down of debt. At a historically normal level of credit-worthiness, very few Americans and American organizations now qualify in terms of hard equity. Again, the solution is demand-side -- we need to build a consumer class again.

3. The banks are lending the money. The TARP money is going (or has gone) straight into the US bond market, which accounts for the bubble in the yields on Treasuries. And therefore there will be a need for more TARP money, because the bad debts have barely been touched. In this scenario, investors are wondering how long the US government can stop-gap Wall Street, because Wall Street is currently stop-gapping the US government.

If the problem is confidence, then I think the banks are under-priced. If they have the capital to wait it out, a stimulus plan can slowly re-value the price of those bad assets. Once we gain evidence of a strengthened American consumer, these assets will be more valuable than they are right now.

If the problem is jobs and wealth -- the lack of any real productive wealth-building for the past three to four decades -- then I say we have the stimulus plan twice over, minus the tax cuts, paid for by a repeal of the Bush tax cuts. Let's invest in America's productivity again.

If the problem is that the TARP money went into treasuries, that means the money went to make more debt rather than pay down debt. To put it mildly, this is a more complex issue. To put it less mildly, this is potentially a harbinger of even bigger problems. For example: Is this putting the Treasury at risk of a default? Is the only thing worse than depending on China, depending on Wall Street?

If it's any two of those three -- a shift in the direction of economic confidence; a lack of jobs, productivity, and actual wealth on the balance books; or a dead treasury -- or god forbid all three, wow: we are short of the middle of a deep contraction and a difficult recovery.