I think that we will have a major contraction, and I agree with your line of thought that the severity and reverberations will be widely, and painfully, felt.
The arithmetic that stan lays out seems perfectly reasonable and defensible. But, my gut sense as a lay guy — hence, my bet on SDS — is that with the derivative exposure sold and resold and resold, someone in the chain has probably not reserved sufficiently, and when it comes time to pay up, he will give a French salute instead of delivering cash. The picture in my mind is of panic and market/system lock up.
I presume many ‘insurers’ have spent the insurance revenue on homes in the Hamptons, apartments in Manhattan, Maseratis, Morris yachts, etc.
