The sorry outcome seen by Usonia in this tale need not be the fate ultimately encountered by that much larger island, the United States of America. Unfortunately, the longer our leaders pursue ever larger doses of the identical policies that were responsible for the financial crisis in the first place, the greater that eventuality becomes.

Although the idea of government stimuli as an antidote to the apparent failures of capitalism was born with Keynes, and nurtured with Roosevelt, it wasn't until Alan Greenspan, George Bush, Ben Bernanke, and Barack Obama that the idea really came into its own. Before 2002, we had never seen federal deficits of this magnitude (now exceeding $1.5 trillion annually), and we had never experimented so radically with ultra low interest rates and manipulation of credit markets.

The mistakes have been so simple, and yet we continue to make them.

In 2002, following the malinvestments of the dot-com era, when billions of dollars were poured into utterly hopeless companies, the economy entered what should have been a protracted downturn. But George Bush, then newly elected, didn't want a bad economy to jeopardize his reelection. So he, and his advisors, dialed up the Keynesian remedies of spending and easy money to an extent not seen for generations.

As a result, the recession of 2002–2003 was one of the shallowest contractions on record. But that benefit came with a heavy long-term cost. The United States ended that recession with greater imbalances than it had before the downturn began. That's not supposed to happen.

Instead of real growth, we kicked off an even bigger asset bubble (in housing) that temporarily overcame the drag of the busted technology bubble. The rising value of housing prices created a great many 'benefits' that masqueraded as economic health. But as we have seen, that vigor was illusory.

The real tragedy is that six years later, when the next crash came, we had failed to learn anything from these mistakes. In diagnosing the causes and prescribing the best cures for the recession of 2008, economists and politicians are getting it dangerously wrong.

In the months since the financial world imploded, a consensus emerged that a lack of adequate regulations brought on the crisis. The roles of government and the Federal Reserve in particular have been largely ignored. As a result, we are getting more of what we don't need (spending and restrictive regulations) and less of what we do (savings and free enterprise).

Wall Street leaders were also irresponsible. The profits made by the big banks during the boom years were obscene. After the crash they should have paid far more dearly than they have. But bankers were playing the distorted hand dealt them by government. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.

Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae, and Freddie Mac (which were always government entities in disguise), and others created advantages for home buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow—until it could grow no more.

Artificially low interest rates (which made the economy appear healthy) invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes seam affordable. Alan Greenspan himself actively encouraged home buyers to partake. Then government agencies and government-sponsored entities compounded the problem by guaranteeing adjustable-rate mortgages based solely on the ability of borrowers to afford the teaser rates. Without such guarantees most of these mortgages never would have been funded.

Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. But government has done all that it can to remove fear from the equation.

And so beginning in 2008, as market forces moved to deflate the credit and housing bubbles, the government stepped in to re-inflate both. First came bailouts for Bear Stearns and American International Group (AIG) and guarantees for other Wall Street firms such as Goldman Sachs and Bank of America. Then came Treasury's $700 billion Troubled Asset Relief Program (TARP) to purchase mortgage assets that no one in the private sector would touch. Then the government bailed out student loan provider Sallie Mae and essentially took over the entire student loan market. Bailouts for Detroit automakers soon followed.

Banks and businesses that should have failed were propped up by government support. Capital and labor that should have been freed up to find more productive uses were instead calcified in unneeded activities.

As consumers logically stopped spending after the housing boom deprived them of easy money, the government stepped in with a massive $700 billion stimulus in order to keep the registers ringing. This spending, which the government has borrowed from future generations, has kept us from the pain of living within our means.

By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment, and help workers transition from the service sector to the manufacturing sector, the government has resisted the cure while exacerbating the disease. In the process, we have turned just about all forms of debt into government debt, and have blown up another bubble, this time in Treasury bonds.

Unfortunately, this bubble threatens to dwarf all preceding asset bubbles. Its eventual bursting, which will cause consumer prices and interest rates to soar, will have even more devastating effects on the economy than the dot-com and housing bubbles combined.

But there is time to stop the train before it heads off the cliff. We need leaders who have the courage to be honest with voters, and voters who have the strength to accept the hard work of economic renewal.

For years we have been living beyond our means, and we must summon the resolve to finally live within them. If we can do that, and allow free market forces to operate unhindered, we can rebalance our economy and set the stage for a real expansion.

However, if we choose to put our faith in debt, the printing press, and the promise of pain-free government solutions, we will all be fishing without a net.