>>>>In this way, highly risky loans make their way to asset holders through Liquidity Providers without any warning or determination being made by the lender.<<<<
There is no way for me to end up with your IOU's unless I trust you directly no matter how many connections there are between you and me. What I can end up with are dollar denominated IOU's you might have owned from a gateway that we both trust. If I trust Bitstamp for $10 and you trust Bitstamp for $10, I could end up with $10 that you initially deposited into Bitstamp or bought in trade.
If you send your buddy a $10 IOU, not from a gateway, but your "personal" IOU and even if that same buddy of yours sends me his $10 IOU via Ripple there is no way I'll ever have your IOU in my wallet unless I specifically set the trust for you in my client to $10. Right now your trust line in my client is set to zero and I wouldn't change that even if a friend asked me to.
I would never do this because I don't know you. What I would do is set $10 trust for our mutual friend, so the debt is between him and me, I own his IOUs, not yours. In order to use Ripple safely all you have to remember is don't trust strangers, something your mother taught you when you were 4 years old.
The real way the trust lines work is not unlike dollar credit balances from my regular business clients. I run a biz which is a B2B operation. My customers order work from me on credit that I extend to them. I extend them credit basically to pay for work that they are ordering for delivery to their business client and so on. The payment terms between me and my clients are not in any way dependent on their getting payment from their customer. I have every legal right to sue them for money they owe me regardless of whether or not their client pays them.
In the real world this is not to say that a bad player using credit going bust can't take down others, we know they can from experience. This happens in my biz from time to time. A big customer or company goes TU and leaves a lot of smaller vendors holding bad receivables, my customers want me to share the pain. The only way around this chance of loss is ONLY ACCEPT CASH.
I can tell you that only the illegal and third World economies run on a cash basis. The real world runs on credit lines like I described above. So your argument that Ripple has already failed is already proven wrong, because the trust lines work pretty much the way the real world of credit between small players works right now.
If I was selling you something I'd want XRP and not your personal IOUs. I'd take XRP because XRP is not at all dependent on me trusting you. This is not all that different than you showing up to buy a used car from me, you'd better bring cash and not a check.
I would also take Bitstamp USD or BTC because I already trust Bitstamp BTC and USD IOUs. I'd also accept BTC from you.... BUT I'd want 3 confirms before I handed over the goods. Still takes about an hour, right?!
If you paid me in XRP, Bitstamp/BTC or Bitstamp/USD the transaction would be almost instantaneous.
Therein lay the real reason Ripple has value.