No, it's zombie companies kept alive by stimulus cheques, and management who get to stick around and failing companies that should have gone under 20 years ago.
In the scenario you're asking for - the zombie companies just layoff employees, cut wages/benefits, landlords evict, etc. The zombie lives on just fine until the market corrects while everyone else fails.
You're correct that failing companies need to fail but your "just let the free market handle it" approach is a fairy tale.