The 6.25% loss might not be terrible…but the weird thing is how much of this debt has been turned into derivative products created by some hedge fund math phd turned finance wizard. Alot of very smart people have created a lot of very weird financial products used by completely unregulated entities with god knows what sorts of exposure. Remember Long Term Capital Management? I think there is hedge fund exposure (based on complicated bets on the dollar, oil, mortgage debt, god knows what else) that completely dwarfs their exposure. Who knows what will happen to these hidden derivative markets in your scenario. That’s what is scary.
I don’t expect a depression (hey brother can you spare a dime sort of depression). But alot of people are going to losing their homes to foreclosure – the growth curve on the notice of default data for California is a sight to behold. It looks like housing PRICES in 2003,4,5.
