Whiskey and Car Keys for Wall Street

Lew Rockwell makes hay with a couple good analogies. First:

[The vice chairman of the Federal Reserve] said the Fed would follow "flexible and pragmatic policy making" and "act as needed."

Whoo hoo! You see, to markets that are worried about the future, this was interpreted as a pledge to lower interest rates and flood the economy with more credit.

Let's ask ourselves: why would this make anyone optimistic? Let's say that you are playing the game Monopoly and one player proposes to double the money stock for everyone. The problem would be obvious to everyone. If the prices on the board could change, they would double. Since they can't, the game will only last twice as long as before. Meanwhile, players would become more reckless with their investments in houses and hotels. It wouldn't really make the players more wealthy; it would only create an illusion that would be temporary.

The analogy isn't exact, but the point should be clear. Paper money is not the same thing as wealth. Wealth comes from trade, investment, and capital accumulation. Money is merely a tool that facilitates the creation of wealth; it is not identical to it.

So what good does the new money do? From the perspective of Wall Street, it forestalls a recession. But what if a recession is needed? That is to say, what if a business downturn is what the economic fundamentals call for? In that case, new money injections do positive harm by preventing a correction and only add to the eventual problems that we all must face. It is no favor to the drug addict to keep him high until he is a corpse, and it is not good economic management to keep an economy drugged up until it hits the wall.
...
So why is Wall Street cheering? Is the investor class merely looking for another credit subsidy? The sad truth is yes, that is precisely what the financial markets want. This should not surprise us. A profligate and drunken son might be ruining his life, but the last thing he desires is to be denied access to his parents' credit cards.