Has the aggregate credit rating of US citizens and US businesses been irrevocably damaged, and if so, to what degree? What are the consequences of that drop in credit worthiness?

Hopefully it will signal a return to sane lending standards and prevent future over-leveraged speculators from blowing up massive asset bubbles.

Also keep in mind not everyone is bankrupt or has bad credit. In fact, most people I know are either lifetime renters or in an affordable, fixed rate mortgage (and I’m 35, about as median as they come).

Whats probably going to happen is there will be a global shift over the next three years as the over-leveraged FB’s foreclose and the renters buy up their properties at a steep discount. Basically the two groups will switch places (as they should).

As far as businesses go, the Fed can always nationalize one of the big banks and then start lending to businesses with poor credit directly. If they go bankrupt they can just print more money.

And maybe the second question: how much of the counterparty fear associated with the “credit crunch” is valid, and how much is invalid? There seems to be a conventional wisdom that the fear is mostly invalid, but I’m not sure that’s the case.

The fear is for real, that is for sure. And its due to the fact that nobody knows how much counterparty risk there is.