Explain the economy - I'm stupid

I've tried not to blog much about the 'financial meltdown', any of the seven 'Black Fridays' we've experienced or the falling share prices of pretty much everything - partly because I'm so bored of the story, and partly becuse most of it simply doesn't make sense to me.

But my main topic of ignorance, is the one that gets me most angry and confused all at the same time. If all the banks are in the same mess, where they do't have enough capital, why is the main focus of sorting out the economy and the banking industry dependant on "Banks having the confidence to lend to each other again".

If we are about to throw £37bn (on top of the other cash we've wished down the river) to these ailing banks, why is it that we are doing so, just so that they can lebd to each other.

How I see it (and this is where the 'stupid' probably comes in), is that the banks are pretty much in debt (due to the mortgage writedowns) and we are bailing them out but then we're encouraging them(!) to borrow more from other banks and then inter-lend.

What?

Hypothetical - Two sisters are maxed out on their credit cards, at the limit of their overdrafts, smashed the piggy bank with pennies left to get them through the month.

Dad then gives them £1,000 each to get them through the month, enough to 'get by'.

Then one of them has to borrow more later on in the month.

This girl shouldn't be getting daddies money any more, in my opinion.


A few months back, we ploughed billions into the markets, "to free up liquidity" and encourage inter-bank lending. Now, we're doing the same thing, when we were before led to believe the last happy-sack of £billions should free up the markets.

We, like the dad, shouldn't be funding a system like this, or is there more to it I just don't get?
Please help me understand this, because I'm beginning to see the banks as wannabe wags who just shop for shoes.