A skinned knee stings for a bit, but then the pain quickly abates and the knee scabs over and it heals itself. What we're facing is more like the diabetic who has a wound on his foot that just won't heal and is threatening to turn into gangrene.

Jim Jubak sees strong parallels between our own situation and Japan's lost decade with the Fed repeating the mistakes of Japan's central bank, which pressured banks to bail out bankrupt companies and allowed them to hold worthless assets on their books for far too long.

So we have Bank of America absorbing the corpse of Countrywide and Citigroup, Bear, Stearns and Merril Lynch letting class three assets hang in a sort of purgatory on their books as they hope Fed interest rate cuts will allow them to minimize their losses. Instead of dealing with the pain all at once, the unhealed wound lingers, an open invitation to infection. Better the loss of a toe or a foot than septicemia setting in. Better the losses get booked now, and if need be, the corpse of Citi and Merril Lynch picked over, then for this systemic rot be allowed to continue.

word for word; but before I could type it, I saw your post and you said it better than I could. I was going to say it was more like a broken knee, but you got the same reasons why; and especially the gangrene from not booking the losses and it isn't just American firms.

The pain center is well connected and these big banking corps refuse to go down, preferring to drag whole economies down with them. If we had real leaders, there would be no caving; cut the losses like we did with the NASDAQ bubble burst. But the reason why that won't happen is because these big banks own the FED and the FED owns the govt. In reality, it is mom and dad that broke their knee caps and the whole household is reeling.

Here, here. Cut your losses, take your lumps, reap what ye have sowed.

Government bailouts are not the way to go, it just convinces firms (and individuals) that they can act recklessly in the future because the last time they did and things went belly up, Uncle Sam swooped in and rescued everyone. Case in point: the airline industry. How many times can you go bankrupt, Delta?

And since when has the Fed's mandate been to please traders and market makers? I thought it was all about supervising and regulating the financial system, and preventing bank failures, inflation, etc..? Maybe I'm just being old fashioned.

But the moral hazard argument goes for consumers as well. Predatory lenders aside, what do you have to be smoking to think you can afford a house 5x the price of your last one when your income hasn't budged in the interim? They're mortgages, not miracles. ARM stands for ADJUSTABLE, if you can't be confident that you can afford the payments under the adjusted rates, maybe you're not responsible enough to own your home in the first place.

but, just remember that the bubble was fueled by greed as folks tried to turn a fast buck riding the housing boom and escalating values. Well-to-do folk were told to divest in the stock market and pour money instead into jumbo homes; their over sized house was their investment. Most developers were building bigger houses, and the condo craze was rife with investors flipping away and making really fast bucks... until they hit the wall and got stuck holding mortgages on four or five condos that no one needs, not even to rent.

Every sin of American banking and every govt corruption associated with American banking... was exposed. What we discovered was American money practices are not so beautiful.

Exactly, they all got greedy and broke the cardinal rule of investing: diversify! The speculative investors were the worst practitioners, I just feel sorry for the owner-occupier lemmings who followed the herd and put all their eggs into our basket case of a housing sector.

I also blame the likes of A&E and TLC, what with their Flip This House and Flip That House series (and many others). Nothing like convincing the kind of people who stay at home watching daytime TV all day that they can get rich in the real estate market.