Economy flounders, despite the stimulus

(CNN) -- A year after a nearly $800 billion stimulus package was passed, the U.S. economy still finds itself mired in mediocrity.

Economic growth is stagnant, unemployment remains higher than almost any time since the Great Depression and millions of Americans are upset that trillions of taxpayer dollars have been committed to numerous government bailout programs with no improvement of the economy within sight.

They question, rightfully, is where this money is going and why it hasn't been as helpful as the government has claimed.

The problems with stimulus packages are manifold. The primary reason they fail is because they do not address the roots of the problem. If you are unable to identify the cause of your problem, then your solution is doomed to fail.

In the case of the current economic crisis, it had its root in loose monetary policy and easy credit that skewed the allocation of resources within the economy.

Combined with other measures to promote home ownership, these easy money policies caused a massive housing bubble. Money that would have been put to other uses was used to produce raw materials, hire workers and loaned to homebuyers, all while home prices spiked.

The boom was, of course, unsustainable, as many prognosticators pointed out during the housing bubble's peak. But the damage was done, and now that the bubble has burst, we need to stand back and allow the mess to unwind. Yet the government does everything in its power to stave off true recovery and is attempting to re-inflate the bubble.

Rather than allow prices to fall so that the housing market returns to a sustainable level, the government does everything in its power to try to keep housing prices elevated.

The reasoning behind the stimulus package was that underconsumption was to blame for the collapse of the housing bubble and the resulting economic crisis. The government seems to think that if consumption can be spurred, then the economy will be return to normal.

In reality, the collapse of the economy was not caused by a sudden lack of consumption but rather a malinvestment of resources into sectors of the economy that were unsustainable without easy credit. The rise in housing prices was not, in fact, indicative of the new normal but rather an indicator that something was seriously wrong.

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