But I'm still confused.
$2T is at risk. That does mean $2T has been lost. It just means there is a risk. We just three $850B at the problem which covers more than one third of that risk. And let's also note that the 5 million homes who have "at risk" mortgages will never be worth precisely nothing. They are wood and stone, these are viable dwelling places.
I just don't see how this amount of risk, which is collateralized with tangible assets can destroy the entire world's economic infrastructure.
That is exactly and precisely how I see it. You’ve summed it up perfectly. Except for one thing... My “training” tells me that the money we threw at the problem is meaningless. You canNOT manipulate the market, and it will find its value. $850 moved from point a to point b in the econ will have NO good effect. Joe gets 850, but Steve loses 850. “The good economist sees not just what the gift created, but also sees all that was NOT created when the money was moved from where it was found.”
The problem is, I think, that certain large banking institutions used a high degree of leverage to gamble with these securities, relying on insurance provided by AIG. When AIG couldn’t handle all the potential claims, banks got nervous and didn’t trust the solvency of many other banks so the latter couldn’t borrow and then make loans. Thence, a credit freeze in certain sectors.