"Even if current market outcomes in some sense are judged unsatisfactory, intervention ... cannot be considered the obviously correct solution. Deliberate intervention by the state not only might serve as an imperfect substitute for the spontaneous market process of discovery; but also might impede desirable processes of discovery, the need for which has not been perceived by the government. "
Kirzner's point is that even if our problems are the result of market failures -- and with so much intervention, how could they be? -- there is no reason to believe that government could do a better job. Quite the contrary.
The relevance of his ideas to what ails the economy now should be clear. The current interventions prevent market participants from adjusting to new conditions. Banks might be willing to sell their shaky loans to investors at a steep discount, but why do that if the government might bail them out? Why not wait to see if you can get a better price? With the politicians constantly changing the details of the bailout, selling at a discount today might get you accused of fiduciary malpractice later.
Uncertainty over what further new regulations may be imposed only stifles the market's search for solutions.
Markets are never perfect. They are made up of people making their best judgments, and people's judgments are never perfect. Yes, under some circumstances market activity such as speculation and short-selling could harm innocent bystanders. But those who say government is the best protector are wrong because the knowledge problem is an insurmountable obstacle.
There is only one genuine protection for the public: the discipline of profit and loss. Nothing concentrates the mind like the prospect of bankruptcy.