Consultant and all-around smart guy David Smick, author of The World is Curved, makes some good points here:
1) The great myth of 2008 has been that the financial meltdown has stemmed solely from a U.S.-initiated subprime mortgage market collapse and the resulting global fallout. If that were the case, the problem would represent defaults and/or write-downs on a fraction of a $1.5 trillion problem. This would hardly be a cheerful development, but nonetheless would represent a situation manageable by global financial markets.
2) A number of analysts talk about eight bubbles ranging from the subprime mortgage loans (again, $1.5 trillion) to emerging market debt ($5 trillion) to outstanding credit card debt ($2.5 trillion) to commodities derivatives ($9 trillion) to commercial real estate ($25 trillion) to foreign exchange derivatives ($56 trillion) to credit default swaps ($58 trillion) and so on.
3) Global financial markets see that the eight bubbles represent roughly $200 trillion of worst-case global financial exposure. Factor in a conservative 10 percent drop in the value, or 10 percent default rate, on this exposure and the world would face a $20 trillion challenge. Here's the catch (and why the markets remain so nervous). The GDP of the entire world is only $50 trillion. World stock and bond markets are now valued at less than $100 trillion.
4) Translation: Psychologically speaking, central bank monetary stimulus and government fiscal intervention efforts (in the hundreds of billions of dollars) are no match for the market'sfear of a worst-case scenario involving tens of trillions of dollars. The numbers are simply mind boggling.