We may or we may not be at the brink of Great Depression 2.0.  Whether we are or not, the crisis will likely worsen in coming weeks and through it all, the death knell for markets, particularly of the free variety, will be sounded.

We’re already hearing how markets have failed, how greed overtook the country, and how deregulation and free market ideology are to blame.  The solution?  Almost always more government control.

Unfortunately, over the past few decades many policy wonks, public leaders, and politicians have claimed the ideas of free markets as their own, all the while increasing the size, scope, and budget of government.  They paid lip service to the ideas, but in few ways did they actually work toward implementing the ideas.  In doing so, the very definition of free markets has been distorted making public debate about whether or not markets are failing, especially free markets, terribly difficult in this present crisis.

Let’s clear things up a bit.

Are “free markets” to blame for this mess? Simply put, no.  A market is basically an individual or corporation trading something of value for something else of value with another individual or corporation.  A free market would be one in which the exchange is free of government regulation or manipulation.  Try and think of something that isn’t somehow regulated by the government.  It’s hard to do because free markets do not exist in America and have not for a very long time, if ever.

So what about markets in general?  Did they fail?  Are they to blame for all of this mess?  Again, the answers are no.  What you are seeing is the failure of government and the power of the market.  Try as the government might, it simply cannot suppress the invisible hand of the market.  One way or another, the invisible hand will sort things out to determine the real value of stocks, goods, houses, labor, and anything else of value.

If you walk into a grocery store to buy some apples and find that apples are $10 a pound, are you going to buy?  Probably not.  Is that a failure of the market?  No.  It simply means that the grocery store overpriced apples.  So if the grocery store crashes the price of apples to something more reasonable like $3 a pound, are you going to buy?  Probably.  Did the market fail because the price came down?  Absolutely not.

It’s the same thing for stocks and houses. 

Last week Treasury Secretary Henry Paulson said, “Let me step back a bit and provide a little perspective.  As I've long said, the housing correction is at the root of the challenges facing our markets and our financial institutions.”

I disagree.  The root of the challenges facing our markets and our financial institutions is the government-sponsored credit binge.

Under Alan Greenspan’s leadership, the Federal Reserve opened the spigot to easy money and the country drank deeply.  Money was printed and credit was made available to the banks.  The banks naturally took their cut and then passed the credit on to their customers in the form of easy-to-get loans of all sorts.  The customers then went out and bought houses, cars, TVs, vacations, and all manner of consumption goods.  We were drunk on credit.

All of this easy credit inflated asset prices, kept the economy growing, and thoroughly indebted the country.  Home prices climbed to unsustainable levels in every housing market around the country.  And how do we know house prices climbed too high?  We know, because the markets worked and the housing bubble popped.  Just like the overpriced bag of apples at $10 a pound, the overpriced houses are coming down in price.

Sadly, now that our country and many of its people are up to their eyeballs in debt there isn’t a lot of cushion for an economic slowdown and so there isn’t a lot of tolerance for pain.  Instead of taking the pain and working through the debt hangover, in a panic the government is now proposing we drink a new, credit-induced bailout to forget about our problems.

The cure for too much debt is not more debt.  The cure for this problem is to free the markets, set a responsible monetary policy, and let the chips fall where they may.  If we do not confront the problem now and deal with it like adults, the government’s actions will push us into a great depression, just like in 1929.

Devin Foley is director of development for Center of the American Experiment.