Why do economists tell is we have a problem of low spending and a credit crisis, are they that dumb?

Economists want banks to lend but a bank can only lend what the depositors save.





They then tell us that savings is bad for the economy.





So how can we fix the credit crisis without stopping spending?|||Some Keynesian economists have resurrected the thrift paradox (http://krugman.blogs.nytimes.com/2009/07鈥?/a> arguing that the overall savings, and thereby the supply of loanable funds have in fact declined, despite increased saving rates of the private households. However, somehow I don't believe that a shortage of loanable funds is the problem.





The problem is that the risk aversion of banks has increased dramatically since the mortgage crises and since the government let Lehman default. There is sufficient liquidity in the market for the banks to lend. But instead of lending, banks prefer to invest excess liquidity in the bond and money markets. The liquidity comes from an expansive monetary policy of the Fed. This easy money policy of the Fed is to provide an incentive for banks to lend and not, as many observers believe, to monetize the federal debt or to increase the GDP.





Increased savings mean that households save a higher portion of their income for future consumption instead of consuming now. This adds to the loanable funds, which are currently not channeled through to productive investments, because of (1) the risk aversion of the banks, but also (2) because of pessimistic business confidence of the firms, delaying their investments. Net result is that the economy is stuck: consumers don't spend, demand decreases, banks do not lend, businesses do not invest. To break the circle, the governement has to increase its spending to jump start the economy, increase business and consumer confidence, businesses will increase production, demand for labor will increae which will provide additional income and increase consumer spending.





In summary: we need higher consumer spending (not higher savings) and the banks to return to a sound lending practice (not the kind of high risk, reckless lending, motivated by moral hazard and adverse selection) by unlocking the currently unproductive funds sitting on their balance sheets. This is not mutually exclusive, in concept.|||We can't. We're knee deep in Keynes pointed out to be "the paradox of thrift." On an individual level it's good to save rather than spend money on consumer goods. When a nation as a whole decides to increase its saving rate demand for goods dries up and stores close laying off their employees.





@additional details: yes, yes they are mutually exclusive goals, hence the term "paradox of thrift." Right now the Federal Reserve is monetizing the debt of the US government so that banks can loan out more than individuals save. That will present a host of problems later. Addressing your question directly and in simple terms: Both of those mutually exclusive things need to happen, that's why they call it a crisis.