The near-collapse of the secondary and sub-prime mortgage markets claimed it’s first victim yesterday:

TUCSON, Ariz. — First Magnus Financial Corp., a national mortgage lender that is suspending operations, says it has laid off 99 percent of its nearly 6,000 employees nationwide and closed all of its more than 300 offices. According to a notice filed with the state Friday, the Tucson-based company that originated home loans and then sold bundled loans into the secondary loan market expects to retain only about 60 of its employees. First Magnus officials said a bankruptcy filing was possible. On Thursday, First Magnus announced that it had stopped originating new loans and was suspending operations. Company officials said the lender was caught in the credit liquidity crunch now causing a meltdown in the mortgage industry, even though First Mangus was not engaged in selling “sub-prime” mortgages that sparked the crisis in recent months.

This follows Thursday’s announcement by Countrywide Financial that it had tapped into a $ 11.5 billion line of credit to deal with liquidity problems brought on by the problems in the mortgage industry, and is clearly one of the reasons that the Federal Reserve Board decided yesterday to lower the discount rate by .5%.

Yesterday’s action by the Fed did turn the stock markets around, and it’s likely to help most of the mainstream banking industry deal with the short-term liquidity crisis that’s developed in the past several weeks, but the collapse of First Magnus and Countrywide’s liquidity problems should be a signal that we are far from the end of this particular story.

But here’s the thing to remember. What we’re seeing is not a “market failure” and it’s not a sign of some inherent defect in the banking system, it’s the “effect” part of a cause-and-effect scenario that started with the downturn in the housing market. For years, mortgage lenders were foolishly giving money to people who, foolishly, thought that interest rates we hadn’t seen since the 1960’s would be here forever and that they could afford to buy really expensive houses. When that proved not to be the case, people started defaulting on their mortgages and the lenders who gave them money started experiencing liquidity problems.

If anything else, this entire episode should remind everyone that the free market doesn’t prevent people from making foolish decisions, it just ensures that, in the end, there will be consequences paid.

In other words, There Ain’t No Such Thing As A Free Lunch.