Not completely equivalent, but the basic idea is that we cannot pay what we owe. Just cannot. The crash is inevitable, and will be severe. Trying to delay the crash makes it worse.
So what. I took out the loan on the mansion using my $5,000 truck as collateral so I’m good. And the interest rate is really low now - so I would be a fool NOT to borrow as much money as possible.
Does anyone know if Bed & Bath rents linens?
No. Pay what you owe in the case of a mortgage is a real debt. An amount is borrowed with the expectation of it being paid. That is not at all like these derivatives.
For example one of the largest, possibly the largest of all derivative markets is is bond insurance or CDS. One buys this insurance at a price derived from the credit worthiness of the issuer. You can insure a top rated bond for very little. A few dollars a year to cover every $1000 face amount (the actual quantities insured and not in single bond increments but this is easier to use to explain). Now the company selling (or buying) the insurance is accepting a few dollars to insure a much larger amount.The difference in what they take in and what is promised to pay in the event the company issuing the bond does not is all risk. It’s a potential obligation that becomes real in certain events. The company selling the insurance needs to put aside some reserves but nowhere near the amount potentially owed (like life insurance. That differential is what the article speaks to.