Senior Fellow Kevin A. Hassett

What caused the financial crisis? President-elect Obama had a simple story during the campaign: "Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression."

According to this view, which was echoed vocally by Obama's economic team, deregulation and conservative ideology are to blame.

There is a simple test of this view. Countries around the world have wildly different regulatory structures. Some, like the U.S., have relatively light regulatory structures, and rely more on free markets to discipline institutions. Others, including Germany and Turkey, regulate a good deal more.

If Obama's thesis is correct, then the economic crisis should be worse in the countries that have looser regulations fueled by a "failed ideology."

The data show the exact opposite.

The vertical axis in the accompanying chart measures the change in stock performance among major industrialized countries during the past year. The horizontal axis is the Fraser Institute's Economic Freedom of the World index, which provides a measure of financial-market freedom. The index measures economic liberty by taking into account government size, property-rights protection, monetary policy, trade freedom, and regulatory barriers across countries. Freedom increases from left to right.

The fitted line is a regression line that captures the basic tendency of the data. If Obama were correct, the line would slope downward, and countries that are economically free would have had bigger collapses in their stock markets. In fact, the line is upward-sloping, which implies that over the past year, countries that are economically free have suffered less than countries that are not. (For those keeping score: The line is statistically significant.)

The data tell a startling story. There is no country that went unscathed over the past year. Even the most aggressive European regulatory states suffered terribly. As we consider regulatory changes, there is no successful country in the OECD that the U.S. could consider copying.

A terrible storm has certainly swept the world's economies into recession. It will probably be years before we fully understand that storm. But at this moment, we do know one thing: Countries that were less free fared worse.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.