Banking meltdown: What happened, what’s next?

So far, the mortgage-related credit crunch has been contained in the financial sector, says Fortune’s Colin Barr in, while the broader market has remained fairly resilient. With the collapse of Lehman Brothers and the capitulation of Merrill Lynch, though, “that resiliency seems likely to fade.” The root of the problem is that Wall Street firms greedily expanded their balance sheets through leveraging assets, without taking proper precautions against losses. But don’t forget, they “got fat during the housing bubble” by “trading debt tied to the massive expansion of consumer indebtedness in America.” Sadly, they’re not the only ones leveraged, and with the bill due, it’s likely we’ll all be “paying the price.”

“There has, indeed, been an unprecedented collapse in finance and also in housing,” says Anatole Kaletsky in The Times of London, but that doesn’t mean the “chaos” will spread to the “real economy.” The “never-ending” mess in the U.S. financial system has not prevented the U.S. economy from stabilizing and even expanding. That’s because damage in the hyper-leveraged financial sector is largely confined to trades and bets with other financial firms. That’s the “relatively good news.” Unfortunately, the deleveraging of the financial system will have some wider fallout—newly unemployed bankers could hit consumption, and tougher lending conditions might well take a greater toll on housing and other assets.

“Wall Street was supposed to be a place where everything had its price and where glory was for risk-takers,” says David Weidner in MarketWatch, but it turns out that the big players are only willing to take risks if investors and taxpayers are on the hook when things go bad. The fall of Lehman and Merrill Lynch have a message, and it’s not that “the market will grow healthier from this pruning,” as you’ll hear all week. Rather it’s this: “You’re on your own, suckers.” It’s not the first time we’ve had to learn this; the market panics of 1907, 1929, and 1987 had the same lesson. “Investors have always been the ones to take on risks. Wall Street firms just like to profit from them.”