Ezra with the nutshell:
The banks that held the mortgages had begun letting other groups -- hedge funds investors, etc -- invest in the payback of mortgage debt. When consumers stopped being able to pay back mortgage debt, it wasn't only the banks who got hit, but the investors who were essentially insuring the banks. And because no one really knows who holds what debt, no one's really sure how far this thing will spread, or who will collapse. The fall of Bear Stearns was all the more unsettling because it was totally unexpected. And nothing scares the markets like the unexpected.
One more thing: I get the argument that bailing these folks out does too much to save the rich. But if we avoid a recession, it also saves the poor. Why can't the government do a bail out but insist on personal consequences? I.e, if these companies want help, their executive class gets fired. It's fine to want to teach Wall Street a lesson, but you probably shouldn't let the economy tank on principle.
Well, the market lusts after nothing like the unexpected, either...and in that sense, the principle that drives the whole system is expect the unexpected. Only trouble is everyone wins when the good unexpected happens. The bad unexpected is a little different. But Ezra's right to point out that the bad unexpected needn't mean everyone loses just to even things out. Although I'd add that avoiding a recession also saves the middle class. No, I'm not implying that losing the ability to lease your Lexus is worse than losing your ability to feed your children.