On day of Bear bailout, economy's cracks widen

Did you read the bit in the article about the 25-year-old kid with "investment properties" in San Francisco and a "lifeline" in the form of a huge home equity loan? That's nothing more than gambling, dressed up as investment (of course, investment banks and hedge funds were doing the same thing on a much larger scale, so it's hard to say that kid was being much dumber than anyone else.)

The article very clearly describes the downward feedback loop that is underway, but what it doesn't tell you, is how this loop is a mirror image of the feedback loop that puffed up home prices in the first place:

1) People overpaid for houses because capital was cheap.

2) Rising home prices made mortgage-backed equities look like a safe, high-return investment.

3) High-risk investment funds (such as hedge funds) went on margin to buy these MBEs in large quantities.

4) Increased demand for MBEs caused mortgage originators to lower lending standards, which made capital cheaper.

5) Goto 1.

I'm certainly annoyed that the government is bailing out companies that should have had better judgment in these matters (companies like Bear Stearns could have interrupted the cycle at step 3; mortgage lenders should have been exercising better judgment at step 4), but I don't see that it now has a choice. When banks the size of Washington Mutual (whose bonds are now almost junk) and Bear Stearns start to go bust, the greater economy has one foot in the grave, and another on a banana peel.

That said, I don't think the Fed is going to save us from our own greed. They can only do so much before they risk turning the dollar into toilet paper. The rest of us just have to not be the 25-year-old kid in San Francisco with huge debt and multiple property "investments" -- he deserves to lose his ass.