Will the $700 Billion bailout save the US economy? I don’t think so, mainly because I’m not really sure where the money is going – I don’t think even congress understands how it’s supposed to work.

Keith Fitzgerald, investment director of Money Morning, wrote an interesting hypothetical letter to Ben Bernanke about what steps he ought to take to save the US economy.

Dear Dr. Bernanke,

I’m sorry to hear that you don’t know what to do about the credit crisis. That must be terrifying to you. I can tell you, it is certainly that frightening to the hundreds of millions of Americans who have seen their homes plunge in value and who now are watching their investment portfolios get vaporized.

Ben, you’re fighting the wrong battle and you have been since Day One, when you took over from your predecessor, Alan Greenspan.

You’ve been printing money on the assumption that this action will stimulate demand. That’s great in theory, but it’s clearly not working.

Here’s why.

Every dollar you print devalues every other dollar in circulation. What’s more, each new dollar you print also stokes inflation, which is why Americans are feeling pinched right now.

Forget the housing crisis or the consumer confidence statistics that you and elected leaders seem to be so focused on: These are the byproducts of the monetary problems I’m referring to – and aren’t the root cause.

The credit crisis began because there was too much money available. Not having enough money has never been an issue.

What is at issue – and what’s causing such pain in global markets at the moment – is that banks and other financial institutions will no longer lend to each other.

Americans – and, indeed, consumers worldwide – are caught in the middle. That’s why they’re unhappy. Of course consumer confidence is at all time lows, housing is melting down and wages are stagnating. But, again, those are byproducts, and not causal factors.

Here’s a five-step plan that I believe will help sort this out. It’s simple, but it’s decisive, and that’s what’s needed right now.

Step 1: Stop printing so much money. Take steps to restrict the monetary supply, including limiting how much “fantasy” currency the credit card companies can create. This is money that’s not backed by anything except the companies that created it. I’m sure you see the irony here, since it’s the companies that created the collateralized debt, the special-investment vehicles (SIVs) and other derivatives that caused the trillion-dollar problem roiling the markets right now.

Step 2: Create incentives for institutions to lend to each other, a strategy that includes raising interest rates. You could argue, as will many who read this, that this will stifle demand. I’ll concede that this might happen in the short run. But in the long term, this will provide a natural hedge that will selectively weed out those companies that shouldn’t have been in the game in the first place.

Think of it as a form of “financial Darwinism” and, by all means, talk to Paul Volcker to get his perspective. Many people thought he would kill the economy in the early 1980s when he raised interest rates to the sky to kill inflation, but that didn’t happen. In fact, you could argue that he set the stage for one of the greatest bull markets in history.

Step 3: Stop socializing debt. The public treasury is not a proxy for handouts, so stop treating it as such. We do not need the current credit crisis fiasco turned into social debt that will burden our country and every American for countless generations in the future.

The latest surveys reveal that up to 80% of Americans think the financial institutions that got us into this mess should be allowed to fail. So why are you pandering to the politicians who insist on bailing them out? Nobody will bail me out if I fail to make my debt payments anymore than they will assume your personal debts, either.

The fruit picker in Southern California making $17,500 a year who reportedly “qualified” for a $700,000 adjustable-rate mortgage (ARM) should receive a “stupidity premium” on his next tax return and the mortgage representatives who handled and processed the paperwork should be prosecuted in criminal court for predatory lending – if not for “credit-rating homicide.”

Step 4: Let the free-markets work freely. Contrary to the “Chicago school of economics” free-market strategies that you and your entourage profess to employ, the markets really do want you to take active steps to fix this mess.

Providing more money to stimulate demand presumes that the financial institutions handling it will be healthy enough to do so [or wise enough to deploy it properly – an assumption I find hard to agree with, at this point]. Since I can argue that these financial firms are neither healthy nor wise enough to do so, it’s probably a mistake for you to assume that the new money will rescue weak institutions that shouldn’t be in business in the first place.

If a person is addicted to drugs, and then runs out of the cash they need to finance their habit, they go into withdrawal. You don’t solve that problem by giving them more cash, or more drugs. You do an intervention and send the poor person to rehab.

Similarly, with an economy that has abused credit the way the United States has, you don’t address withdrawal [the U.S. credit crisis] by firing up the financial printing presses – which is tantamount to a federally sanctioned credit-line extension. Again, it’s time for an intervention that stops consumers from abusing credit.

Step 5: Tell the American people the truth. The Federal Reserve Act of 1913 requires the Fed to promote stable prices. You’ve got a once-in-a-generation opportunity to do so … and to make a difference.

Let those idiots on Capitol Hill know that their actions are interfering with your ability to do your job. Point out to them what “Everyday Joes” already know, and what you know – that “the emperor has no clothes.”

This is not a political issue for either party and you need to make that clear when you draw your line in the sand.

This is a generational crisis. Every single one of us is responsible for the path ahead – but precious few folks besides you are in a position where they can truly make a difference.

President John F. Kennedy once said that “the hottest places in Hell are reserved for those who in a period of moral crisis maintain their neutrality.”

In other words, sir, don’t damn yourself.

In closing, people do not write books about Captains of Industry who don’t know how to take charge any more than they will write about Fed chairmen who have no clue about how to fix things.

But history does look back favorably on decisive leaders who act with conviction. You have the chance to play that role right now – regardless of who’s in the White House. And I urge you to grab that chance.

Best regards,

Keith Fitz-Gerald

Note that this letter was originally published back in March, 2008!