As seems to so often be the case, the media and elected officials have it exactly backwards.
Peter Schiff explains in: Don't Blame Capitalism
I wish I could do a decent job of walking through all the different markets that have significant government "involvement" such that the free market is distorted. The problem is, doing so would require better explanations than I can give -- I'm a programmer after all, not an economist. But, I think I can just list a few that come to mind and maybe that will help.
- Fractional Reserve lending -- Bank basically creates counterfeit money with the government's approval and regulation.
- FDIC -- Government insuring depositors in case banks screw up the loan side of fractional reserve lending too badly.
- Federal Reserve -- Not federal (private banks), and these days doesn't have much in the way of reserves unless you're willing to hold your nose and count their "other securities" at face value instead of the 5 to 20 cents on the dollar the market says they're worth (when/if you can find a buyer at all).
- Fannie Mae and Freddie Mac -- Massively leveraged purchaser of mortgages, driving demand for mortgages up and reducing or outright eliminating the risk of default for the originating lender (meaning the guy writing the mortgage didn't have to care if it would default anymore).
- Community Investment Act -- Pushed/required banks to issue loans to people with worse credit ratings if they were from certain geographic areas (typically urban lower income areas).
- Federal Deficit -- The federal government sucks up hundreds of billions of investment dollars each year ($400+ billion for 2009) -- this is money that could otherwise be invested in private investment opportunities. But, the risk associated with Treasury bonds is considered to be substantially low, making them attractive for investors with certain goals.
- Treasury Department -- main line money supply manipulation by printing more or fewer dollars -- impacts inflation.
- Federal Reserve -- money supply manipulation by controlling interest rates and reserve requirements. Basically, the Federal Reserve can create credit booms.
In fact, booms tend to take more fuel to produce the same gain because there aren't enough quality recipients for the money. Think of the stupid business models that got funded in the tech boom, or the moronic No Income No Job (NINJa) loans in the recent real estate boom. Without somebody artificially increasing the supply of money available, the demand for stupid things falls much quicker.
So, instead of a brief flirtation with petrock.com and mydogspics.net, hundreds of billions of dollars were tossed onto the tech bonfire. Then, since money has to go somewhere, we poured hundreds of billions of liquidity kerosene onto the 4-alarm fire that was the real estate bubble. The securitization of mortgages and the loose underwriting standards (encouraged by banks not having to care if a mortgage defaulted since it was off their books) has really gotten the apple cart upset.
The free market response to this is amazingly simple: let the businesses that did stupid things go bankrupt, their productive assets will be purchased by businesses that didn't go under (because they weren't stupid, weren't as stupid, or just got lucky). The plan to bail out the retards that screwed up their companies is just a good way to reward the guilty instead of letting the market punish them. I read a great quote to this regard: "Crime that pays is crime that stays."
So, show me a market that the government hasn't screwed around with, upsetting the normal supply and demand. Odds are, that market isn't in the process of coming unwound.