The crisis at Fannie Mae and Freddie Mac provided yet another body blow to the already reeling US economy. With so many people now gripped by the prospect that the economy may be headed toward recession, the blame game has started.

Many have begun to point an accusing finger at an unlikely suspect: the free market itself. There is a new disease spreading in America's punditry: fair-weather capitalism.

Peter Gosselin captured the mood well in a recent piece in the Los Angeles Times. "The nation and its political leaders," he wrote, "have begun to sour on the notion that the current market system is the key to a fair, stable and efficient society."

While it isn't at all clear that most people agree with Gosselin, this perception must be taken seriously. The view that markets no longer work, if true, would turn economic thought on its head and be a major intellectual victory for the American left. Widespread acceptance of that view would have profound implications for the future of market economies and open the door to a massive expansion of government.

So have markets failed us?
Two years ago, if you asked any American who wasn't a far left activist why the US has outperformed the more socialistically leaning economies of Europe and Japan, they would have pointed to our heavier reliance on free markets.

Americans have hardly been the only ones to learn that lesson. Europeans have been aggressively paring back their high tax rates and heavy regulations, and the former Soviet bloc in particular seems to have been anointed into the Reaganomic priesthood.

Facts Speak Loud
Why the intellectual victory for free-market thinkers? It's not because they convinced everyone in academic seminars; the academic environment has hardly been welcoming to conservative economists. No, the victory occurred because the facts spoke for themselves.

A wide body of research has developed that demonstrates the empirical relationship between free markets and economic growth. A study by Harvard University economist Robert Barro found that property rights and free markets were the most important institutional elements for promoting economic growth.

Similarly, the Fraser Institute's 2004 Economic Freedom of the World Report documented that the free-market recipe of competition, entrepreneurship and investment activity is the key to fostering economic growth. According to the study: "Countries with more economic freedom attract more investment and achieve greater productivity from their resources. As a result, they grow more rapidly and achieve higher income levels."

Regulation Hurts
Studies also show the negative impact of regulation on growth. Harvard economist Silvia Ardagna and Dartmouth College's Annamaria Lusardi found that tight regulatory environments discourage entrepreneurs who are motivated by new business ideas.

US economic might helped win the Cold War, and countries that have copied or even improved upon the US system have seen their prospects change dramatically. Nations from Ireland to Estonia have embraced free-market ideology and seen a historically unprecedented economic transformation.

It is important to note that this victory has been about long-term trends. Two years ago, free-market sentiment was perhaps at its zenith. The widespread acceptance of the view that free markets are the best path to prosperity was based on decades of experience. Yet severe fluctuations did occur.

Deep Recession
We had the 1973 oil crisis, where prices quadrupled, the 1979 Iranian turmoil, which also devastated oil markets, and the savings-and-loan debacle, where more than 700 banks failed. Even the glorious Reagan revolution was marred by fluctuations: One of the deepest recessions of the postwar period happened during Reagan's first term.

Even with those setbacks, the free-market system won because other approaches didn't merely deliver fluctuations, they delivered constant misery.

So what has happened this time that's so much worse than anything before? The answer is nothing.

New things have gone wrong that demand new approaches from policy makers. But markets themselves aren't the root of the problem.

Let's address each of the negative elements:

Oil-Price Surge
First, oil prices. Oil prices are high because global demand has skyrocketed as countries such as China and India have embraced the free market, and begun to grow rapidly and consume more energy. Thus, oil prices have soared because free markets work, not the reverse.

In housing, the story is more complex. Financial institutions clearly made terrible bets that prices would continue rising, and that put the economy at risk. Homeowners pursued their dreams, only to see them dashed as interest rates on variable-rate mortgages adjusted upward and prices dropped.

Their suffering is real, and Congress is right to do something to ease it.

But is the housing crisis enough to undo decades of experience that free markets work? Hardly. The truth is prices fluctuate, sometimes people guess correctly, and sometimes they don't. This has always been true, and was especially true during the period that convinced the world that the free-market system is the best.

Joy and Stress
Consider it this way. Almost 68 per cent of Americans own their homes. In Germany, only 40 per cent do.

Those numbers are so different largely because the US is more economically free than Germany. Higher income growth and easier credit have led to greater home-ownership rates in the US, and conditions that are more difficult to predict. This set the stage both for joy and for stress.

But even after the dust settles, Americans will be far ahead. No one will be able to claim we would have been better off adopting a wholly different system.

We absolutely would have been better off if banking regulation had been more rational, and if zoning regulation didn't contribute so much to the surge in real estate prices. Changes to our system must, of course, be made.

One can practically guarantee that another mess will happen down the road. Americans have always accepted that as part of the free-market bargain, and you can bet they will again this time.