On September 24, President George W. Bush—a self-professed devotee of the free market—addressed the nation in an effort to drum up support for an unprecedented intervention in the U.S. economy. The political elite, left and right, were united in their desire to spend other people’s money to purchase depressed financial assets at premium prices. If the federal government did not step in, said the president, a “financial panic” would likely result. But despite reports all last week that a “bailout deal” was imminent and, finally, that a “reformed” version was “sure to pass,” this would-be massive wealth transfer from the middle class to Wall Street’s reckless plutocrats was defeated by Congress on September 29.

For President Bush, this marked yet another failure in the most unpopular presidency in U.S. history. Democratic leaders, who joined Bush in calling for the intervention, were exposed as allies of the same financial interests that are said to dominate the GOP. The successful opposition to the bailout came from both ends of the political spectrum, with conservatives in both parties and principled liberal Democrats uniting to send a message to Wall Street: “Get off America’s back!”

Stock Market Wipes Out Illusory Gains

As a result of the bailout’s failure, the stock market experienced a historic meltdown on Monday. The Dow Jones Industrial Average plummeted a record 777 points, and the S&P 500 and NASDAQ composites fell by even greater amounts, 8.8% and 9.1%, respectively.

This has led some observers to believe the hype: that the failure to pass the bailout bill put the economy in peril. The truth, of course, is the exact opposite: it was government intervention that promulgated this most recent crisis, and only the promise of continued government intervention was keeping stock prices as high as they were. If the bailout had gone through, perhaps the markets would have rallied—but at what cost? The debasement of the dollar that would have accompanied the massive monetary expansion needed to finance the $700 billion bailout would have eaten away as much of your portfolio’s value as Monday’s crash, even if your account showed nominal gains.

The Roots of the Crisis

The roots of the current crisis stretch back to 1913 with the passage of the Federal Reserve Act or certainly to August 15, 1971, when the dollar’s connection to gold was finally severed. But more directly, we can turn back to that fateful day: September 11, 2001.

After the Twin Towers fell and America began its interminable “War on Terror,” we should have had a rather serious recession. We were, after all, recovering from the Fed-caused inflationary bubble that gave us the tech boom and bust. But instead of allowing the economy to return to normalcy, the Federal Reserve—with the blessing of the Bush administration—slashed interest rates to provide “economic stimulus.” Bush, in particular, encouraged homeownership as part of his “ownership society” platform. Thus, hundreds of billions of newly created dollars were pumped into the economy, staving off a recession—for the time being.

Seven years later, the chickens have come home to roost. Greenspan is out of office, and Bush has one foot out the door. The aggressive interest-rate manipulation they orchestrated led to the boom phase of the housing bubble and set up this inevitable bust. Artificially low interest rates sent false signals to consumers and businesses, incentivizing them to take actions they would have never even considered under a regime of real interest rates set by savings and investment. When economic conditions returned to reality, all of Greenspan and Bush’s excess liquidity hit the proverbial fan—and created quite a mess.

Keep an Eye on the Fed

So IndyMac, Lehman Brothers and WaMu all failed, and we were told there would be more bank failures unless the government intervened. To finance the $700 billion bailout, the government would have issued new bonds, for which the Federal Reserve would have created the money to buy. An extra $700 billion would have been added to the money supply, diluting the value of the dollars in your savings account and redistributing wealth from hardworking Americans to Wall Street hotshots who made bad bets.

Thankfully, this travesty has been averted—for now. But even though the bailout bill failed, don’t expect the Federal Reserve to slow down its monetary expansion. When AIG needed its bailout, Congress wasn’t even consulted: the Fed just “monetized” an $85 billion loan to the ailing insurer, and it could “monetize” $700 billion worth of loans to various beneficiaries just as easily.

But the Fed must tread lightly. The long-dormant populist spirit of the American people has been invigorated. The Federal Reserve has operated with impunity for close to 100 years, but if it thwarts the will of the people by proceeding with the bailout—in defiance of Congress—then it will be exposed as the unaccountable instrument of monetary destruction that it is.