Quote from achilles28:
^If memory serves, total notional value of subprime mortgages was around 1.3 Trillion, in 2008. So no, a 1.3 Trillion writedown is not big enough to bring down the US economy, or the world economy, for that matter.
Essentially, the problem was (and is) jobs. America has been in decline for the past 30 years, yet, thanks to dovish interest rate policy > lavish consumer credit orgies and exploding Government deficits, that growing hole in the labor market (thanks to offshoring, over-regulation and speculative bubbles), was papered-over with borrowed cash.
The subprime/stock market collapse was merely the needle that threatened to break the camels back. An uninterfered collapse would put a immediate stop to all that borrowed money. With that, the economy would revert back to it's equilibrium state, which is probably north of 20% unemployment and S&P <550. The problem is structural. What our genius politicians have done over the past 3 decades is export a huge swath of our productivity to Asia, and kept our economic ship "afloat" with borrowed cash, to blur cause and effect.
This is why Occupy Wallstreet and the contagion in Europe is just the beginning. The consumer is maxed out. And the Government is nearly at it's credit limit. Global wage arbitrage has our paychecks in decline saddled with astronomic debtloads. Unfunded entitlements like Social Security, Medicare, Medicaid, Obamacare are all just paper fiction that won't be around in 5 years, let alone 20.
At this point, any credit crisis that severely chokes Government borrowing would implode the system. That's why Central Bankers have stepped in and taken over the role of commercial lenders, who are now on the ropes. Unless consumer debt-to-equity flips over in the next 24-36 months, or some type of revolutionary technology breaks into the mainstream on par with the combustion engine or electricity, we're headed for a serious Depression, with gutted Social Programs, social unrest, political chaos, and likely, "populist" solutions like price-wage controls, shortages, capital controls, FTT. etc. Bottom line: the economy is deficient by 25%, in terms of jobs. That means all paper assets are severely over-priced and headed for a collapse (real estate, stocks), unless the Fed props and we do Argentina and rape everyone, to keep the rich solvent. Which they very well may do. In that case, civil unrest, demonstrations and violence will be much worse as the inflation tax hits the poor and the underclass hardest.
