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Larry Kudlow’s op-ed piece in yesterday’s Wall Street Journal, "The Prosperity Boom", captures the essence of today’s optimism.

"The high-tech, productivity-driven U.S. economy is more durable and flexible than its liberal-left critics will ever admit. It is a private-sector free-enterprise economy, not a government-planned one. Innovation is strong and entrepreneurial spirits are high. The four prosperity killers, a paradigm coined by Arthur Laffer many years ago, all look dormant: inflation, taxes and regulatory burdens are low, while free trade keeps expanding."

Yet there’s a fundamental problem with the Kudlow, Art Laffer and bullish consensus view of the U.S. economic miracle: Finance is today hopelessly unsound. And the reality of this predicament is that if you lose your bearings and get your finance terribly wrong, well, other things (so-called "fundamentals") end up not really mattering all that much. In general, a lot of decent economic policymaking can be more than negated by financial system mismanagement. More likely, Credit system misdeeds and resulting pricing distortions will elicit policy decisions which only exacerbate financial excess and Bubble tendencies. Credit Bubbles (and attendant asset inflation) tend to turn conventional analysis on its head, with "good" policies deemed those that work to prolong the fateful boom. Self-reinforcing asset Bubbles and policymaker complicity are virtually guaranteed – and pose a great systemic dilemma.

When it comes to so-called "prosperity killers," a prolonged bout of rampant Credit and speculative excess has no equal. Moreover, a decent case can be made that, for example, cutting taxes and reducing regulator burdens during a burgeoning Credit Bubble will only exacerbate excess and resulting economic maladjustment. Promote "pro-growth" programs in the midst of terminal "blow-off" excesses and you’re hankering for a real mess. And, as we appreciate, confusing moderate consumer price inflation for astute policymaking and stable finance is a hallmark of the disasters back in the late-twenties in the U.S. and late-eighties in Japan. These are not a political views, but analyses of Credit, inflation, and speculation dynamics.

Not surprisingly, Mr. Kudlow and others are content already to target foreign scapegoats for our heightened financial and economic instability: "…The trigger for Tuesday’s drop undoubtedly came from China. The Chinese have sent a Shanghai flu across the globe." He blames "higher reserve requirements for banks, tighter interest rates, stricter implementation of a capital-gains land tax, and perhaps some form of capital controls are all in the rumor mill. This sounds like root-canal advice from the U.S. Treasury and the IMF, which somehow are dissatisfied with 10% growth and 2% inflation in China. France, Germany, Japan or Latin America should have it so bad."

Today’s economic policy fanatics haven’t met a Bubble they haven’t fallen for. This group also seems determined to keep their heads planted firmly in the sand, with analysis incredibly off the mark. In their (over-confident) minds, analyst warnings of the perils of poor lending, leveraged speculation, derivatives, Current Account Deficits and Bubbles have already been proven inept. All the same, the Chinese stock market was certainly not the "trigger" for heightened global market tumult. Instead, look directly to the realm of (U.S. gone global) "contemporary finance" – risky lending; imprudent risk intermediation, packaging and disbursement; rampant leveraged speculation; and sophisticated derivative trading strategies. The consequences of massive liquidity excess, global performance-chasing financial flows, trend exacerbating hedging-related trading, and unavoidable (Ponzi Finance) instability will inevitably come home to roost. It started this week.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.