Free Market to Blame For The Mortgage Crisis?

I knew it would only be a matter of time before I would read that the free market is to blame for the current housing bust. Below is an excerpt from a letter to the editor of the New York Times:  

Its cause is the rigid, unrealistic ideology of the “magic of the free market” — with its doctrinaire aversion to almost any regulation of our financial systems.

This ideology is also the underlying reason that Alan Greenspan, when he was chairman of the Federal Reserve, refused to take any action even when knowledgeable experts repeatedly warned him about an out-of-control mortgage market.

I think the Times reader who wrote the letter has a couple of things confused: 

First of all, the free market cannot be blamed for the mortgage crisis because the free market was not allowed to function. The artificially low interest rates were set by the Federal Reserve. In a free market, interest rates would have naturally risen, thus thwarting the possibility of a massive malinvestment in housing.

Second, Alan Greenspan was in no way being guided by the free market ideology. His job as Fed Chairman prohibits it. If a person fixes the price of anything (interest rates included) he is thereby not allowing the free market to function.

Finally, there is no "magic" to the free market. On the contrary, "magic" would be if wealth really could be created by printing money out of thin air.