Mortgage bailout and the raping of the free market

Quick economics brief:

Way back in the day, somebody came up with the idea that free markets basically regulate themselves (how's that for citing exact references). The idea is that as people do dumb things they lose money, and it's self-regulating, and people don't do really stupid things with their money and expect to keep it, because there's no parental figure which "refunds" your bad investments for no cost to you.

... until now. See, the federal government is loath to let bad things happen to the economy. Hence Greenspan, the great blower of bubbles, is praised for preventing people from taking losses by postponing them behind even bigger losses. It's reminiscent of the national debt: just keep spending and inflating the bubble, and don't think about when you run out of structural integrity, because bubbles bursting is apparently unthinkable.

It reminds me of the National Park Circus' approach to fires before they figured out controlled burns. They'd put out every fire, until there was so much dried-out finder everywhere, that when a fire started, it was impossible to stop until it burned down the entire forest. The difference between that and the national government managing the economy is that someone in the park circus actually figured out that you need to let small fires burn out to prevent huge fires from destroying everything.

The "solution" for the mortgage crisis is to let the comparatively small fire burn. I know, it's a duh to everyone not involved in bailout efforts, but somehow the people making those decisions are too stupid to see it. People who could not afford houses should lose them. Banks who made bad loans should take losses on them. Investors who bought CDO's backed by bad loans should take losses on them. If you don't punish the child for stealing a cookie, tomorrow he'll be robbing a bank, and thinking that there's no downside, because even if he's caught there will just be a bailout.

And it's not just the idiots buying houses they can't possibly afford; the smart investors who bought the CDO's are banking on the government bailing out the home-"owners". The only way to prevent people from inflating the next, even bigger bubble under the same assumptions, is to prove the assumptions wrong and not bail out the debtors; any bailout encourages more bubbles in the future.

So I ask the treasury department: are you trying to cause another, bigger housing crisis in the country, or are you too dumb to realize what you're doing? Which is it?