In an economic bust like today foreclosures, bankruptcy and failed financial instruments and institutions insuperably forces economic actors to deleverage and move closer to solvency, in the process raising uncertainty and individual demands for money. But note well, heterogeneous changes in demand for moneys among different economic actors will alter various different production processes and various different relative price relations in significant non-uniform ways — the great poverty of the economics of Keynes and Malthus and Yglesias is to imagine a magic universe where there isn’t a system forcing folks toward solvency and away from leverage and debt invested in endeavors which consume and destroy wealth rather than produce it. In magic land the creation of money and debt can magically “coordinate” everything because in Keynesian/Malthusian/Yglesiasian economics THERE IS NOTHING TO COORDINATE — by fiat of assumption. There are no endeavors involving leverage and debt continually consuming and destroying masses of wealth (such as those recounted in Michael Lewis’s The Big Short or John Taylor’s Getting Off Track). And so the magic wand of dumping more money into “the system” — including into those wealth destroying endeavors — is seen as a “solution”.
Hayek puts a spotlight on Keynes and the poverty of his approach here:
“The relative prices of the various types of goods and services, and therefore the rate of profit to be earned in their production, will always be determined by the impact of the monetary demand for the various goods. And unless we study the factors limiting the supplies of these various types of goods, and particularly if we assume, as Mr. Keynes does, that they are all freely reproducible in practically unlimited quantities and without any appreciable lapse of time, we must remain in complete ignorance of the factors guiding production.”
I encourage everyone to read Michael Lewis’s The Big Short — you won’t find a more powerful pro-Hayek / anti-Keynes account of the impossibility of a dump-more-money “fixing” of the Fed / finance industry / Fannie created artificial boom and unavoidable bust than the final chapter of Lewis’s book.