Dueling Analogies:

One of the interesting things that is going on with the financial crisis is the issue of "dueling analogies." In fact, I think that may be the key to understanding the wisdom of the policy interventions here--and the dueling analogies. If this is primarily a liquidity problem, then the the Federal Reserve is doing the one thing it is set up to do--be the "lender of last resort" to keep the system from collapsing due to insufficient liquidity. Thus, the intervention would be justified to prevent a long-term destruction of value. The analogy here is the liquidity collapse of the Great Depression. The ban on short-selling might arguably be justified under this theory as well.

On the other hand, the real problem here may be an underlying economic problem of misvalued assets, not a liquidity problem. In which case, economic logic tells us that the interventions are simply slowing a much-needed swift and ruthless correction. Arnold Kling suggests that the correct analogy is misguided imposition of wage and price controls during the Nixon administration, which simply slowed a necessary market correction thereby trying to avoid short-term pain but making the long-term adjustment much deeper and more painful.

Gentlemen choose your corners.