HLS: Excellent synopsis. We should also take that one step further and discuss leverage as well.

The real downside risk here is the amount of leverage (generally 10x to 20x) that is at play in the markets right now, and the role that CDS instruments play in backing up (the now nearly worthless) CDO market.

Leverage played a huge role in inflating this massive trio of bubbles (Housing, Credit and Stocks) and the resultant deflation (leverage in reverse) is going to amplify the bust by at least a few orders of magnitude.