Occupy Wall Street reminds me of a doctor who sees a patient with a broken arm, decides that both arms are broken, and proceeds to amputate them: The diagnosis is half right, and the cure may be worse than the disease.

Start with the diagnosis. "Us against them" always makes for good theater. But is the big problem with the American economy really the top one percent versus the rest of us? Are we being victimized by the fat cats? The data seems undeniable. The share of income going to the top one percent has risen dramatically over the last 40 years. If the top one percent have more, surely the rest of us have less, right? But as the writer P.J. O'Rourke has said, wealth is not a pizza. If we're sharing a pie, and you get a bigger piece, that does not mean that I have less to eat. It depends on what happens to the size of the pizza. Ten percent of an enormous pizza is more filling than all of a tiny one.

The protesters are right about one thing: Washington has been coddling Wall Street. But they have missed the most important way that Wall Street lives off the rest of us. Programs like the Troubled Asset Relief Program of 2008 are red herrings. TARP did send $700 billion to Wall Street, but most of it has been paid back.

There is a much more important, albeit quieter, favor Washington has been performing for Wall Street over the last 25 years: When large financial institutions get into trouble, policymakers make sure that their creditors receive 100 cents on the dollar.

The economist Milton Friedman liked to point out that capitalism is a profit-and-loss system. Profits encourage risk-taking. Losses encourage prudence, which is just as important. Over the last 25 years, however, government policy has been laissez-faire when it comes to profits, and socialist when it comes to creditor losses. That is a very destructive cocktail. It has encouraged imprudent risk-taking financed with large amounts of borrowed money. When you subsidize recklessness, you unsurprisingly get a lot more of it.

The bailouts of large creditors -- such as the 1984 rescue of Continental Illinois, the 1995 rescue of Mexico, and the 1998 government-orchestrated attempt to save the creditors of Long-Term Capital Management -- sent a signal to large lenders that they might lose little or nothing if the investments they fund go bust. That in turn made lenders much less cautious, allowing financial institutions to use borrowed money, rather than their own capital, to finance the housing boom.

Using borrowed money instead of equity lets you keep the upside for yourself. Such an arrangement is always appealing. But why did lenders accept such risks when they do not share in the upside, especially when the investments were increasingly risky? Part of the reason is that government created expectations that lenders might get their money anyway.

And they often did. When Bear Stearns went belly up in March 2008, the government did not let the firm go bankrupt. The Federal Reserve guaranteed the toxic assets of Bear Stearns to make the acquisition deal sweeter for J.P. Morgan Chase. But the real impact of the deal was that Bear's creditors -- mostly other large Wall Street firms -- paid no price for financing Bear's debt-financed mistakes. J.P. Morgan Chase honored those obligations 100 cents on the dollar. That reinforced the expectation that large firms could lend and borrow from one another with little or no risk. Reckless leverage is what made the crisis a crisis rather than something milder.

The received wisdom is that it was the failure to rescue Lehman Brothers that worsened the financial crisis. But it was the rescue of Bear Sterns' creditors that let Lehman continue to roll the dice, using borrowed money rather than pulling back and raising more capital.

The real cost to Main Street has not been the transfer of taxpayer money to Wall Street. The real cost to Main Street has been Wall Street's imprudent lending and investment, which led to lending trillions of dollars to build more and bigger houses. That was a bad use of precious capital. The incentives to invest wisely have been distorted. And we are all still paying the price for the collapse of highly leveraged firms.

This is not capitalism; it is crony capitalism. Occupy Wall Street's diagnosis of a parasitic symbiosis between Wall Street and Washington is correct. The coddling of Wall Street let borrowing get out of control, unnaturally enlarged the banks, and helped justify and fund bonuses that otherwise would have been much smaller.

But the top one percent includes a lot more people than just Wall Street executives who have been living large because of the opportunity to leverage investments with borrowed money. The top one percent included Steve Jobs, who grew fabulously wealthy by making the rest of us better off. The same goes for Sergey Brin and Larry Page, the founders of Google. These innovators make enormous sums of money, but the gains to the rest of us are even larger. Great innovators make the economic pie bigger.

When we fail to distinguish between those who grow the pie and those who shrink it, we are going down a very dangerous road.

If the protesters want to fix the symbiosis between Wall Street and Washington, the first thing they need to do is recognize the disease. The disease is not too much capitalism but too little. If firms that fund bad investments by other firms lost all their money, they would either disappear or learn to be more prudent. Washington needs to be less involved with Wall Street, not more. We need less crony capitalism and more of the real thing. We need to demand of our politicians that they stop bailing out losers 100 cents on the dollar. If we keep subsidizing recklessness, we will keep getting more of it, and the rest of us will pay the price.