WASHINGTON—Having spent part of my life in the developing world, I know that the nationalization of an industry or an institution is an act of robbery perpetrated under the pretense of altruism—sort of like putting lipstick on a pig—and that the consequence is poverty. That is why I and thousands of Peruvians took to the streets in 1987 to protest the government’s attempt to nationalize the financial system. We prevailed, and the country was eventually able to begin its tortuous march toward modernization.

In arguing against nationalization, I often point to the United States as an example of prosperity brought about by a private enterprise economy in which, by and large, success and failure are not socialized. But after the takeover of major financial institutions by the U.S. government and the plan to buy Wall Street’s bad debt—to the tune of $700 billion-plus—I will have to eat my words.

From now on, any petty tyrant anywhere in the world who takes over an industry will shut his critics up by saying that an American administration led by the party of free enterprise has done a de facto nationalization of a good chunk of U.S. capitalism.

Nothing justifies burdening taxpayers and future generations with colossal liabilities because a bunch of irresponsible bankers under the incentive of institutions designed by irresponsible politicians lent money to irresponsible citizens. The free enterprise system is a permanent referendum on the conduct of private enterprises, some of which are approved by the market while others are not, in a never-ending cycle of capital allocation determined by supply and demand, and the prices that flow from them. When a government gets in the way of that process big time, it doesn’t ease the pain of economic failure—it perpetuates it.

The financial meltdown has two components. One is immediate—the subprime mortgage collapse. The other, of a more profound nature, is the country’s habit of living beyond its means.

The collapse of the mortgage market is due to a number of factors, but perhaps most importantly to the Federal Reserve’s inflationary policy. Just as inflation helped engineer the dot-com bubble of the 1990s, a policy of easy money resulted in a disproportionate amount of capital being allocated to the housing market—capital that would otherwise have gone to more productive uses.

The other, more fundamental flaw in the nation’s economy—consumption backed by debt instead of savings—also originated largely as a result of government policy. It has to do with deficits and debts that we were told did not matter, entitlements that we were told were fully funded, and borrowing guarantees that we were told were only a “last resort.” The funny thing about last resorts is that they always get the last laugh.

No matter how much wealth a country enjoys, when it loses the connection between consumption and production, savings and expenditure, effort and reward, there will come a time of reckoning.

The link between the financial collapse and the underlying problem of a nation living beyond its means is big government. Which is why the solution that the Bush administration is applying with support from the Democrats—even bigger government—is the wrong one.

Understandably, the government wants to protect the savings of numerous Americans. That argument, however, presupposes that there is both a painless and a painful solution—the painless being the government rescue of the financial system and the painful being letting these institutions go down. But in what way does the massive wealth transfer from Main Street taxpayers and future generations to Wall Street constitute a painless solution?

Yes, if the government were to let these institutions fail, the loss of value would affect many people. But isn’t that already happening? In any case, the cleansing process would begin soon, capital would find its way back to more productive activities, and Wall Street would have to change its behavior. In the future, there would be greater restraint on the part of the Fed, the Treasury and the regulators who are now in bed with those whose actions they oversee.

Perhaps then the “fundamentals of the economy,” in the creative sense in which presidential hopeful John McCain attempted to redefine the phrase, will prove to be “strong” because hardworking, thrifty and responsible Americans will continue to show why the United States is still the best argument against Third World tyrants who nationalize their countries’ economies.