Bear Stearns

I'm no economist, so let me take this step by step to see if I understand.  The recent "credit meltdown" is due primarily to firms extending loans in unreasonably risky ventures.  

And what is meant by "unreasonably risky?"  Well, I assume that in a free market, rational people would judge the kinds of activities that are likely to drive oneself into bankruptcy, for instance, to be "unreasonably risky."  

So, when an investment firm like Bear Stearns makes unwise investments, it will go bankrupt, and such a failure is not only just, but is precisely the sort of signal that is required to indicate a danger zone to the rest of the market, in case any other firms happened to be doing similarly foolish things.  

And finally, the Federal Reserve, which is staffed by a lot of really smart people, will see this and realize that the very last thing they should do is jump in and use tax money to "bail out" a firm that made foolish mistakes, since that will only encourage the foolish risk-takers and punish the reasonable firms, right?

Wrong.