Second, risky subprime loans, and the conversion of them into questionable investment vehicles, were encouraged by government, starting with the Federal Reserve. Lax underwriting standards were promoted in a Boston Federal Reserve study as a way of expanding home ownership. Reduced standards were subsequently pushed by federal regulators, including even the Department of Justice through legal actions against lenders. In turn, the 1995 revision of the Community Reinvestment Act permitted subprime loans to be packaged into mortgage-backed securities. The incentive to repackage loans into questionable securities was then strengthened by the Fed, which in 1999 waived its own rules and began purchasing such assets in short-term open market operations. In short, the shaky investment vehicles that are collapsing were initiated and then promoted by the federal government. Third, what about lack of regulation? There's not been an absence of regulation. Economists at George Mason University have recently documented that federal financial regulation has continually expanded from 1990 to present. What we have is a system in which some institutions and forms of investment are subject to more stringent rules than others -- this is as it should be. It's not unreasonable that FDIC-insured bank deposits be subject to strict regulations, while investment banking shouldn't be regulated, but simply follow proper rules of accounting and contract. Unfortunately, it does appear that banks have shifted supposedly safe funds in the regulated parts of their operations into their less-regulated affiliates, using 'fancy' accounting, with regulators turning a blind eye (although this month the Fed officially began allowing federally-insured deposit institutions to provide liquidity to their non-insured at-risk speculative affiliates). But this isn't the result of deregulation or free markets; it's a failure to enforce honest accounting and existing standards, quite a different problem. This is a not a full account of the origins of the crisis, but it's enough to demonstrate that financial markets were neither free nor deregulated. It's not that private financial players have been blameless; there's been an enormous amount of manipulation of the system. But it's a system in which government interference skews the rules and incentives. And the root cause of the mess is Federal Reserve manipulation of credit and credit markets. Unfortunately, it appears that panic over the crisis is pushing us in exactly the wrong direction. We're on the verge of granting broad new powers to the feds, giving them additional ability to manipulate investment, and allowing them to push private financial losses upon the taxpayers. Before we stampede to add additional layers of regulation, we should understand that government intervention in the market generated the crisis in the first place. Charles N. Steele is an assistant professor and Herman and Suzanne Dettwiler chair in economics at Hillsdale College in Michigan.