Why is this panel like this and what should I do to fix this problem
There is a lot that needs to be corrected but it looks to me like it could be salvageable.  

I'll focus on the box, there are probably some other issues with supporting the cables and protecting them from physical damage.  Some of the old cloth covered wire may be deteriorated to the point it must be replaced.  

I think someone repurposed an old panel as a junction box using terminal blocks to splice wires within the box.  There is no cover, and there are a bunch of other issues (cables coming in over the edges rather than through clamps, improper terminations on terminals, etc.)    Most of these issues can be corrected pretty easily, but I can't see if there's anything worse going on in there - there very well may be.  

You could replace this with a large junction box / wireway and new terminal blocks, or simply make wire nut splices instead of using terminal blocks.  You could also break this up into several smaller junction boxes and use wire nuts.  

I'd say this is probably one to call in reinforcements.  An electrician will be able to evaluate whether there are serious issues or it's just a matter of cleaning up and replacing a hack junction box.