"It's not a very efficient way to run a financial system, but how else are you going to find out?" Mason said.
That's precisely what happened to Fannie and Freddie, which are especially exposed to slumping housing prices because they own or guarantee nearly half of the nation's $12 trillion in mortgages.
Investors tripped over one another last week to sell shares of the government-sponsored but shareholder-owned companies, slicing Fannie's and Freddie's market values by nearly half. That prompted the Treasury and the Fed to rush out a plan that plants the federal government firmly behind the two mortgage giants.
Much the same thing happened to Bear Stearns in March. Investors in the nation's fifth-largest investment bank battered its stock, but what really sank the company was the fact that its lenders cut off the firm's lines of credit. Lenders feared that the brokerage was so burdened with bad mortgage securities, it couldn't repay what it had borrowed.
The Fed was forced to assume control of some of the least appealing securities and provide $30 billion in financing to pave the way for a fire sale to JPMorgan.
For Countrywide Financial Corp., the situation was similar. The largest private-sector mortgage lender watched its finances fall apart as late payments on its loans surged with tumbling home prices. The Calabasas-based lender was forced in January to let itself be snapped up by Bank of America -- for a sixth of its year-ago market value.
In each instance, the most prominent culprit behind the financial troubles has been a housing market that has fallen faster and further than almost anybody predicted.
As housing prices have continued to fall, they have exposed the weakness of firms built on the presumption that prices would keep rising. As banking consultant Ely, quoting legendary investor Warren E. Buffett, put it: "When the tide goes out, you find out who's swimming without their trunks."
But the nation's troubles have not remained neatly confined to housing, suggesting that other forces besides tumbling home prices are at work.
Just as Americans were growing accustomed to the housing slump and the slump-fed credit crisis, problems broke out in the market for the sort of municipal bonds that underwrite such plain-vanilla projects as hospital and college dorm construction, and that fund student loans.
