There is good reason to ensure the large banks maintain liquidity. The more loans which are written down or off, the lower the assets on the balance sheet. This makes the institution less attractive to investors, who then demand either a high rate of return via dividends (Citibank is stuck paying 6% or more - at today's price, 8.6%) or they look elsewhere.

Either way, there is less money to lend, and since banks make their money by lending . . . the problem tends to become contagious rather quickly. Something similar happened a century ago, when there was no Federal Reserve in the sense we know today, and the nation's leading banker, J.P. Morgan, assembled other bankers to avert another liquidity crisis when Knickerbocker Trust failed (the Feds also kicked in, but only when the industry took the lead). WHY would private bankers help a competitor? Morgan explained to them that those who refused might find themselves in a similar situation one day.

Which brings us to Bear Stearns, the primary casualty of the current crisis. Back in the '90s, they could have helped the situation with the collapsing Long Term Capital Management group, but refused. So today, no one stepped forward to save them (ironically, the bank which bears Morgan's name is buying them at a steep discount). What goes around, etc. . . .

If the reaction to this crisis is to "rescue" too many for their poor decisions - and this includes lenders and borrowers - it will hurt the future for both. If mortgage companies can't charge higher rates for poor credit risks, they will go back to the old system of just not lending money to them. The millions of people with "subprime" notes who are NOT in default now would never have been able to buy their homes, and those similarly situated in the future won't have the opportunity.

The real problems here were 1) a go-go market where investment banks bought up mortgages without properly vetting them, and 2) accepting too many of the subprime mortgages in relation to the number of conventional mortgages, which made the resulting securities far more risky than before (but without investors being informed of the new mix).

We cannot allow liquidity to dry up because that would threaten the whole economy, but other than acting as a guarantor of general monetary health, the market should be allowed to correct itself.

An interesting article in today's Indepedent on another aspect of this subprime/credit crisis...

The Nobel Prize-winning economist Joseph Stiglitz has blamed the "unconscionable" system of generous bonuses paid to investment bankers for exacerbating the global credit crisis.

"The system was designed to encourage risk taking - but it encouraged excessive risk taking. In effect, it paid them to gamble. When things turned out well, they walked away with huge bonuses. When things turn out badly - as now - they do not share in the losses."

"Even if they lose their jobs, they walk away with large sums. It was predictable that this system would lead to problems."

"It is one thing to gamble with one's own money - but these bankers were gambling with other people's money - and with the government [taxpayers] backstopping any losses. This is unconscionable."

Why should the rest of us be penalized for those who chose of their own free will to take out no-money down or interest-only loans and now find themselves in a box?

How very un-Democrat of you! Don't you know that the results other people's irresponsible decisions are your responsibility ?

Let the fools that paid $300,000+ for $100,000 homes lose them, and the nuts that loaned the money lose it. Not my problem but some of the homes may resell for true value and someone who needs a home will end up with them. There isn't a problem if the government agencies and political parties would quit trying to outhelp each other.

Rather than simply 'backstopping any loss',

Here's a better idea: When the Fed bails out a Wall Street bank in danger of collapsing or when government (under the Democrats' bill) guarantees the price of securities that have an unknown amount of bad debt wrapped up in them, the government should retain a stake. That way, if Bear Stearns stock eventually bounces back, or if JP Morgan shows a big profit on its purchase of Bear, or if buyers of any securities guaranteed by the government make a profit - whatever the upside gain turns out to be -- taxpayers that are footing the bill for potential losses get some of that money.