I apologize in advance for the length and lack of structure of this thing. It is kind of a ramble:
For almost 150 years now, people have been criticizing the capitalist system for producing too much stuff but not distributing it fairly. This is not usually an accurate or coherent analysis, but it does contain a hint of truth. Any change in production capability will cause society to be disrupted, as people try to adjust to the new reality.
In some ways, the current financial crisis can be traced to people producing more wealth than they know what to do with. I believe that the acceleration of technological progress and production efficiency will continue to cause disruptions in the future. Society will continue to struggle with the effects of the mountain of stuff that is being produced at an accelerating rate.
Business cycles were originally blamed on factories producing too much stuff for the market to bear, and then cutting production and laying people off when the demand for the goods decreased. This is not the true cause of business cycles, but it is true that people have a habit of making economic fluctuations worse by spending more money in good times and cutting back excessively when things turn bad. They increase consumption when they feel rich, and if something makes them feel poor, they suddenly realize that they were spending money on things that they didn't really need.
However, the roots of the current mess lay in a group of people who did not make that mistake. For the past decade or so, the people of China and other countries in Asia, as well as raw materials exporters, have been saving a lot of money as their economies were booming. For the raw materials exporters, this was entirely rational; they were saving for a future where the value of their exports would be lower. But for the growing economies, it seems to be a puzzle. Everyone expects that the Chinese will be richer in the future. They should theoretically be borrowing money against their future income and spending it today.
The high savings rate of Chinese is not fully explained, but part of the reason is that they live under a lot of uncertainty and do not have the ability to purchase reliable insurance. While the Chinese on average will be richer in the future, any individual person could easily face some crisis, like a medical emergency, that demands lots of cash on hand. And since they already feel a lot richer than their parents, and are living what they think is a lifestyle of luxury*, they don't feel the need to spend more money today.
But the Chinese don't have a reliable financial system to process all of these savings. In a rational world, Chinese savers would loan money to Chinese entrepreneurs in order to finance a new, more productive, business. But this would require a reliable system of courts and regulation, to make people feel that their money was safe. China doesn't have that, so the Chinese savers sent their money to a country that, historically, had offered save and reliable returns on investment: the USA.
In a rational world, this money would have been used to invest in research or technology or projects that would make more wealth in the future. But for a variety of reasons that I don't fully understand, American businesses did not do this. There were some new entrepreneurs and some useful projects, but the money required for these was less than the money available. So our financial system needed to find a place to park all of that spare cash, while earning a decent rate of return.
The result was a speculative bubble in real estate, as foreign money flowed into our housing market. This is not a productive investment. The Chinese money ended up getting spent by American consumers on houses, or consumer goods bought with home equity loans. American consumers should have been saving money; all reliable predictions show that our income relative to the rest of the world will decline in the future. But they just kept spending, aided by societal institutions that encourage more consumption and financial institutions that treated consumer credit as safe.
In short, the Chinese started to make lots of stuff, leaving them with more money than they knew what to do with, and that money ended up in American pockets. Poor people saved money, and rich people spent it. Much of that money was spent on the stuff the poor people were producing. This was not sustainable. It may be coincidence, but the financial crisis hit shortly after the average savings rate of American households dropped to zero. This post shows the correlation between debt and depression; it is not proof of causation but it shows that too much debt is associated with bad things.
This is one reason is why a lot of socialists say that we do not have a problem with production; we have a problem with distribution. Today, there are idle factories and unemployed people, resources going to waste because people are unwilling or unable to purchase the things that they are designed or trained to produce. But at the same time, there are billions of people all over the world who lack the basic tools needed to live a healthy life. We have the unused ability to make a mountain of stuff, but people are dying for lack of that kind of stuff.
I am surprised that no politician has suggested using government money to purchase pickup trucks and ship them to farmers or aid organizations in the third world. That would be much less of a waste of money than some stimulus projects that got funding, and it would be almost impossible to oppose politically. It would prop up the automakers while helping people who are much poorer than we will ever be.
That would not be a long-run solution. It seems that the world has too many automobile factories. Some of them should go away, preferably the ones that are least efficient and worst managed. In the long run, the only way to fix the problem is to put our resources to new uses, providing stuff that improves people's quality of life.
I don't have any easy answers. In times like this, we have to decide between the short run and the long run, and the short run usually wins. The time to invest in the long run is when things are going well, but we wasted the boom years on unsustainable, short-sighted consumption instead of investing in the future.
*A Chinese 'sweatshop' worker will usually have more disposable income than his or her entire family back on the farm, while working in more comfortable conditions.