Economic problem

One of the things that I have tried to practice is to determine root causes. If a system is exhibiting multiple problems you have two things you must do, one make sure the symptoms are under control and second determine what is causing the symptoms.
The current economic situation has led to a lot of symptom treatment behavior. However, are they addressing the root cause?
A simplistic analysis would trace the cause to the loss in equity experienced by many Americans. We reached a point where the supply of houses exceeded demand. When this happened, the price point had to adjust and in falling created a significant economic problem for many individuals. Those who had mortgages that exceeded the cost of their homes (and in many cases this was true of people who had been constantly refinancing) had no incentive to continue in that situation. Further, many people who had borrowed money using loans that required constantly increasing equity, found themselves facing high payments and negative equity.
Of course the money flowing from cheap equity loans led to significant consumer spending and that led to many jobs and a high level of economic activity. Another way to put that would be that many Americans were living above their means.
It is fairly easy to argue that the issue was not restricted to housing, but clearly if we could achieve some balance between supply and demand in that market, prices would stabilize and hopefully people would start to rebuild equity. How can this be achieved? Of course right now it is trying to fix itself since builders aren't building, lenders aren't lending and consumer's aren't buying. This has a consequential reduction in economic activity. The Government is providing billions to the lenders and others but it would seem more logical to provide the consumers with that money so they would spend it. Basically, without increased demand, we are not going to increase supply and economic activity will stagnate.