You and graceza have made this objection after I've rebutted it as a Red Herring, and I'm not sure how I can be any more clear about it.
http://en.wikipedia.org/wiki/Red_herring

Imagine that the IOU was a written contract that is literally passed down line of people.

The contract says, "I [name] owe [name] [principle amount]".

I'm saying, "That's not enough information to make any kind of rational loan."

You say, "But wait a minute, each person in the line creates a new IOU and passes that onto the next one, the first person in the line doesn't make a contract with the last person in the line."

I say,"That's a red herring, that doesn't have anything to do with my objection. The asset holder here at the end of the line can't make a rational decision about the loan based on, 'I [name] owe [name] [principle amount]'. It doesn't help that he knows and trust the person next to him, because even he doesn't know the objective, length of the loan, collateral, or credit rating of the actual borrower."

You say, "No it isn't."

I say, "Yes it is."

What else can I say?

Edit:
Then you really go into the woods. You bring in an outside party from the line (A Gateway), and say, "Look, the last person in this line can lend to this guy (the Gateway), and there isn't any trust problem."

Of course there isn't. I didn't say there was.

The contract between a Ripple Gateway and the user can be as nuanced as the Gateway and lender like because the Gateway is not a Liquidity Provider.