Blind Leading the Blind

Today, I was looking around for investment blogs to try to get information on the markets right now. I ran across Lloyd's Investment Blog, which has takes on everything from the current recession to the correlation between player salaries and wins in Major League Baseball. It is definitely worth checking out.
I just read an interesting post of his entitled Blind Men and Elephant: on the Urgency of Asset Price Reflation. He had an interesting take on the fact that we should have acted back in 2007 (the onset of the subprime fallout and home price deflation) to stabilize asset valuations and index our Federal Reserve policy based on a stock market target (say in the S&P). This would enact a Monetary Policy that would act based on indexed economic conditions as opposed to presumed market conditions. He properly makes the parallels between the lead-in to this recession and into the Great Depression as being caused by over-indebtedness and takes it a step further to deflation. There are several analysts in the financial sector who have properly diagnosed the problems as Lloyd has, and even have created cycles which note a 60 year cycle that goes around from Peak Debt to Peak Cash and back again. We're back again.
This was one of the better Keynesian arguments I have read, as it forced the Federal Reserve to act in a way that has an index of some sort as opposed to just blindly driving the Federal Funds Rate into the ground. As much as I have respected Lloyds argument, I do have to disagree with him on the following arguments:
1) How do you value the target for the S&P or the DJIA or whatever? When the DJIA hit 14,000, would the Bush Administration & Bernacke have redrawn the line based on a new era in wealth and prosperity, even though it was largely driven by exccessive indebtedness? If it is indexed to inflation, couldn't we all determine that inflation is an unnecessary evil through effective currency stabilization and there is no need to ever increase that target? Which leads to my next point....
2) Where is the government debt at in all of this? Deflation is necessary when prices are at unsustainable levels, so what is the government deficit going to do to prolong the recession? In 3-5 years, once unemployment starts to show some slight signs of recovery, the currency is going to drop. This is going to cause massive inflation, our standard of living to drop, our assets to lose value again as the currency is worth less, and unemployment to begin once more. You cannot solve over-indebtedness with more-indebtedness, cannot solve devaluing asset prices by devaluing the only asset that everyone in this nation has: cash.
We need a nation that goes back to working and producing to solve their problems and stop waiting to see what the President, Treasury Department, or the Federal Reserve chief is going to do. When our policy makers realize that the only solution to economic woes is production and not debt and that comes from the private and not public sector, we will begin to dig out of this problem again.
These policies drove us into a Great Depression instead of simply a Bad Recession. WWII lifted the U.S. out of the Great Depression because we began producing guns, trucks, bombs, planes, boats, and food necessary to go fight a war. We need to start producing the goods necessary to get us out of this recession, and begin our war with the economy.
The day that happens, the sun will start to shine on the American Superpower again. Unfortunately, until the government stops meddling in overseas affairs, giving away our sovereignty to foreign nations and organizations, and printing invisible money to give people invisible wealth and financial irresponsibility, we will continue down this road to ruin. Unfortunately, the Bush and Obama administrations have done nothing to warrant that faith, and the Republicans leading up to 2012 do not seem like the type to want the government to have less power (Romney, Palin, Jindal, and others). It's going to be tough to come out of this any time soon.