I used to live right by Banana Bungalow. The problem I have with it is that it's right off Highland Ave in a stretch of road that's sort-of-highway and sort-of-road. Meaning there's no sidewalk anywhere near there, and walking in/out of that place with LA traffic flow can be crazy - I can't count how many times I've nearly clipped backpackers walking up the hill to the place. Other than that, I don't know squat about it
[EDIT: Never mind - I just checked Jake's link and apparently they've moved to Melrose - good location!]
Two of the hostels I've liked in LA are the Venice Beach Cotel - not grand, but it's got a cool bar and loads of cool travelers to hang with. If you want something on the nicer side on the beach, there's the Cadillac Hostel.