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.