There is only one organization in the world with the power to destroy the American economy. Throughout 2008, it has waged a terrible war that has severely damaged -- likely beyond quick repair -- the very foundations of that economy. If left unchecked, the pain we're feeling now will seem minor in comparison to the devastation yet to come.

And no, this brazen cabal isn't based in radical shrines in the Middle East or the mountainous border of Afghanistan and Pakistan. Its headquarters is a hundred square mile plot of swampland between Virginia and Maryland. Regardless of the intent of the U.S. government's economic interventions, the consequences of all that help are shaping up at minimum to rival the Great Depression in depth and scale. The ultimate cost may be far larger: the complete loss of our country.

You're being killed with kindness

The weapons of economic destruction have been forced marriages through bailouts, coerced investments in banks, and cash infusions into utter failures. Every time the government steps in, it crowds out private capital, distorts the signaling value of prices, and impedes the market's ability to cleanse itself by sweeping away its failures. Rather than helping the economy and markets recover, all this "help" is prolonging the agony.

Oh sure -- the stock market has shown some signs of life recently, and interbank lending rates have come back down from their peaks. Yet with over $8.5 trillion "invested" in this nonsense, the real question is why do things still feel so lousy? After all, unemployment keeps rising, Thanksgiving travel was down, and online sales are slipping.

Economic homicide 101

What's happening is an object lesson in the most powerful financial law known to humanity – the Law of Unintended Consequences. In virtually every aspect of the economy that the Fed bails out, its help brings toxic consequences that end up making things worse. Here are just a few examples:

Free money: The Federal Reserve keeps handing out limitless cash at rates below what any lender without a printing press would charge. As a result, private capital is getting squeezed out of the market -- leading to ever more Federal interventions and further weakening of the private lending market.

The consequence of this destructive policy is that even cash flow positive companies like General Growth Properties (NYSE:GGP) can't easily roll-over existing debts. The longer this keeps up, the more healthy companies will be forced into bankruptcy due to the government's "help."

Free houses: It started with IndyMac, and now it has moved on to Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) . As the government seizes control of mortgage firms, it stops foreclosures. As kindhearted as that may sound, it's doing little more than telling everyone who's struggling but able to make their mortgage payments that it's OK to stop paying. That, of course, leads to higher delinquency rates and an even larger reluctance among banks to loan money to prospective home buyers, no matter how creditworthy.

As this Fool pointed out a year ago, the housing market cannot recover if lenders lose their ability to foreclose. Thanks to all this "help," the housing market is still getting worse. It's so bad now that even homebuilders like Toll Brothers (NYSE:TOL) and Pulte Homes (NYSE:PHM) are begging for their own bailout.

State of permanent failure: Perhaps the best vision of the long-term consequences of these bailouts comes from looking at the state of America's automakers. Lobbying for a bailout that is now up to $34 billion, automakers General Motors (NYSE:GM) , Ford (NYSE:F) , and Chrysler are lunging for the trough. In truth, their problems date back decades and are largely due to issues they caused themselves.

Yet this isn't the first round of bailouts for the industry. Lee Iacocca went hat-in-hand to Congress in the late 1970s to beg for loan guarantees cash to keep Chrysler afloat. Yet rather than learning the painful lessons and making the permanent fixes they needed for their long term survival, the auto industry learned how much cash it could access by begging. As a result, the entire industry's problems deepened to the point where it's on the verge of collapse, in spite of very healthy foreign rivals.

Is it over?

The French historian Alexis de Tocqueville once warned that "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." Unless sanity returns to Washington soon, the multi-trillion dollar handouts of 2008 may well go down in history as the precipitating factor that led to our country's collapse.

What a pity -- and how easily it would have been prevented just by letting failures fail and the market cleanse itself when it had the chance.