All the money flowing in from these mortgage payments (many of them the “no money down”/interest-only variety) forced Wall Street to create all sorts of new asset-backed securities, snipping the mortgages into pieces much like a coupon-clipping consumer used to cut up the Sunday newspaper.

We’ve already talked about how the financial-crisis fallout has pounded U.S investors and consumers in guise of plummeting asset values and spiraling prices (inflation) in the face of a stagnant - or even stagflationary - economy (rising unemployment and rising inflation).

Just as we’ve been predicting since Money Morning’s earliest issues last year, the financial crisis is already transforming the United States into the World’s Biggest Garage Sale. Japan faced a similar ordeal, having to dump off virtually all the trophies it had grabbed during its artificially created salad days.

Foreign-government-controlled sovereign wealth funds already are investing billions in some of our choice companies. And they’re making their moves with an almost-surgical shrewdness: They’re snapping up financial firms that possess key competencies, are buying into such strategically positioned ventures as stock exchanges, and in some cases are clearly willing to send good money after bad to learn the art of financial deal making that America once dominated - because we were once so good at it.

Dubai just spent $800 million for a 90% stake in New York’s vaunted Chrysler Building - the first in what figures to be a long line of “trophy” purchases by foreign buyers. Trust me when I say you’ll be able to watch as the sovereign-wealth heavyweights from emerging Asia and Europe, the Middle East - or cash-laden China, with its $1.68 trillion in foreign reserves - begin to snap up high-profile U.S. properties.

But when you’re the United States - and are constantly spending more than you make in the form of the twin deficits of budget and trade - you have to finance your shortfall somehow. And you do that by selling off your best assets to your overseas creditors.

The “Lost Decade” vs. “A Lost Copula Years”

Here’s a little secret. Just as Japan didn’t have to waste the better part of 15 years in the financial equivalent of a locked-room mystery that can’t be solved, the United States doesn’t have to endure 10 years of wasted time, missed opportunities, and watching countries such as China, India, Brazil and others start to put some real distance between us.

But it’ll probably happen anyway. In fact, the longer we wait to take action, the more inevitable it becomes.

Look at it this way. Back in the late 1980s and early 1990s, the United States went through a savings-and-loan crisis right about the same time Japan endured the beginning of its banking-and-stock-market crisis. Today, however, the S&L crisis is hardly a blip on U.S. memories, while Japan’s Lost Decade is now part of global financial lore. The reason for this big disparity is simple: We attacked the S&L industry with great energy, shuttered or sold off ailing thrifts, and decisively enacted new guidelines to avoid such problems as under-funded state insurance pools, lousy capital requirements, and major regulatory loopholes.

Japan did nothing. It refused to acknowledge the breadth and depth of its problems, partly because banks are part of complex, societal cross-linking arrangements known as keiretsus. And because taking action would force it to admit it had handled this sector poorly. By the time Japan finally realized it had to take action, the problem was so ingrained and the losses had ballooned so much that it was too late for decisive action - only time and long-term policy changes could bring about the desired conclusion.

This time around in the United States, the Fed opted for the “prop it up” pathway instead of the decisive route. Think about it. When the subprime crisis broke, instead of permitting the free markets to fix the problem, the Fed embarked upon on of its most aggressive rate-cutting campaigns ever, and slashed borrowing costs at a time when it probably should have been raising them.

Then it set a dangerous precedent when it intervened in The Bear Stearns Cos. (BSC) case, setting up a bailout-and-sale deal with JPMorgan Chase & Co. (JPM). When Fannie Mae (FNM) and Freddie Mac (FRE) came around, the Fed was almost obligated by that precedent to bail these two mortgage giants out - not necessarily the best position to be in when additional failures (such as the Federal Housing Administration, or FHA) are in the offing. Indeed, investing guru Jim Rogers calls the Fannie-Freddie bailout an “unmitigated disaster.”

For some perspective, consider this: This bailout adds $6 trillion to the U.S. debt load - a liability that’s equal to nearly half the value of the output from the U.S. economy for an entire year.

(In his recent “Inside Wall Street” column, Money Morning Contributing Editor R. Shah Gilani makes an excellent argument that the bailouts of Fannie and Freddie, though as undesirable as we say, still were probably necessary and certainly were the only valid exceptions to the “no-bailouts” argument. He’ll detail the FHA predicament in an upcoming “Inside Wall Street” report).

By slashing rates, pumping up the money supply and rescuing poorly managed enterprises, Fed Chairman Bernanke has essentially thumbed his nose at the free-market system, as if to say the central bank can do it better. Financial markets are remarkably resilient. If financial ventures are so poorly run that they’re poised to fail, the free-market doctrine says to let them do so. The pain will be deep, and will certainly have a broad ripple effect, but in the end the marketplace will have flushed the poorly run venture away, freeing up capital that well-run, opportunistically rich companies can use to grow and create jobs.

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