In recent letters, both congressional candidate Michael Oot (Letters, Oct. 3) and the ever-predictable Stewart MacMillan (Letters, Oct. 4) attempt to pin the blame for the current financial crisis on capitalism, free markets and deregulation. Nothing could be further from the truth.

In fact, the current crisis is the result of decades of government interventions trying to manipulate the marketplace. For starters, the two institutions at the center of the problems, Fannie Mae and Freddie Mac, are "government-sponsored enterprises," created by the federal government and backed, as we have now seen, by an implicit guarantee of taxpayer funding.

When Freddie Mac was caught up in an accounting scandal a few years ago, Congress pressured both Freddie and Fannie to expand their loans to low-income borrowers, which led to a boom in lower-quality, high-risk loans. It was political pressure and the implicit taxpayer guarantee that led to the problems at the two GSEs, not free markets or deregulation.

Other political pressure and regulations on banks to lend to more marginal borrowers, such as the Community Reinvestment Act of 1977 and its revision in 1994, overrode the underlying incentives of the market to take wiser risks. Of course the whole housing boom was fueled, at least in recent years, by very cheap and excessive credit coming from the Federal Reserve System, yet another government entity changing the incentives facing actors in the marketplace.

The one bit of deregulation that did take place during the evolution of this crisis was the 1999 repeal of the Depression-era restrictions that separated investment and commercial banking. However, this change has been crucial in preventing the current crisis from becoming worse by allowing commercial banks to buy up failing investment banks and permitting the remaining investment banks to become commercial banks in order to stay afloat.

There is plenty of room for good-faith disagreement about the degree to which these government interventions were responsible for our current crisis. However, it is very difficult to argue that they played no role whatsoever. To ignore the facts of history and to argue that we had some kind of free market, deregulated financial system that failed is to engage in pure demagoguery, not informed analysis.

Steven Horwitz

Canton

The writer is Charles A. Dana professor of economics at St. Lawrence University.