For months now, the ECB has called upon banks to render accounts and undergo a series of stress tests in order to determine the feasability of their business faced with the strain of a financial crisis.

The results clearly show that certain entities have proved deficient and have not abided by the rules set up by national and european regulators. However, their solution is to somehow turn the tide in favour of banks, by expanding their capital base and insuring that such malpractice should now go unpunished. But who are the real victims here?

A report appeared in the Wall Street Journal (European Edition) suggesting that recapitalization was in fact not the remedy, but rather a symptom of a much larger problem: aggregate demand.

Aggregate demand deals with the purchasing power and consumer habits of indiividual citizens, taken as a whole. Since businessowners see no need to expand their business, given the poor demand in most local economies, they certainly do not require the financial protection needed to expand business, but rather to keep afloat.

The main reason why this crisis seems to last for so long is because businesses have lost their mission: they have finally given up in the face of financial difficulty – rather than looking for new customers abroad, they have decided to call it quits, leaving some areas unattended by consumer demand.

Yet the plot thickens. Now instead of searching for an authentic diagnosis of the situation we fall back into the same mistakes, believing that salvation lies with banks. This mentality is a losing mentality and will lead to further economic depression and stagnation.

Banks are an instrument of exchange, but there are two sides to every exchange: namely, aggregate supply and aggregate demand. Indeed, many have pointed to low consumer confidence as the real crisis. As workers continue to experience the hardships of unemployment, expense and budget cuts, their desire to consume also continues to diminish.

In the end, if businesses are unable to find customers, they will not be able to keep their doors open and maintain an operational staff, let alone create new jobs. If banks are not willing to loan money to new businesses, these countries will lose expensive human capital and corporations will seek to do business elsewhere.

The answer lies in rebuilding consumer confidence – however, the idea of raising taxes to finance the incompetency of the banking industry has come under fire and will most likely fail. To rebuild consumer confidence, we need to focus more on what we can do for consumers and small businesses that have been and will for some time, always be, the heart of the economy.

Watch the following video explaining the facts of the situation: