The problem is, that your question is a lot like asking “what will happen if a glass breaks…” The answers range from “The wine might spill and ruin a suit” to “A shard might fly into your jugular bleeding you to death.”
A lot depends on how the economy collapses.
Right now, even as we speak, there are brave heroes and adventurers the world over attempting to stem this tide of collapse. They may not look like heroes, but heroes seldom do. They are little bald jewish guys who call themselves names like “Mr. Big Stick Man,” and “The Big Dog from Down South.” They are hedge fund guys, private equity guys, rogue economists, actuaries and mathemeticians, guys with that glint of megalomania, greed and arrogance just a step or two beyond what is healthy shining in their eyes.
These are the kind of guys who might look at a house on fire and say “I bet once this thing cools off you could take a magnet, collect all the nails and sell them for a tidy profit.”
They are thinking and asking themselves questions. What they are thinking is “I bet those CDOs are really cheap, right now.” The questions they are asking themselves are “What are they really worth? Can we do something with them to extract value?” and things like that.
I know. I used to be one of these guys. In a way I still am. The possibilities cause one to salivate. Mr. Big Stick Man is pulling at his ear hair, and considering the fact that there is a once in a life time opportunity to build an instant empire, a fortune beyond his wildest dreams. If he could somehow extract value from these instruments, than one could price them. If you could acquire them below that price, you could get the all, a trillion worth? for what? 12 cents on the dollar? Surely they are worth more than that. How to get the money out?
Mr. Big Stick Man and The Big Dog from the South are penguins on an ice flow, two of millions of penguins. They are all staring into the water and asking themselves if there are fish down there… or just sharks.
Being the first penguin to jump in isn’t the point. Any idiot can do that. Being the first one to jump back out without getting eaten be a shark is just luck. No point there.
But, the first penguin to come back with a belly full of fish…
That’s a rich penguin.
But how to do it? Lot of blood in the water? Lot of fishies. How many sharks? How to avoid them and get the fishies?
“There has to be a way” Thinks Mr. Big Stick Man. The Big Dog from the South is sure of it. They keep staring at the water. Thinking. I know what at least one of them is thinking. “Maybe I really don’t have to know what they’re worth or be able to extract value. Maybe other people just have to think that I know, or that I can. Maybe.”
It’s not that crazy a thought. They traded so well for so long on such assumptions in the past and billions were made. Maybe.
These are the guys that save us. Chances are they leave a pile of corpses and shellack the taxpayer while outmanuevering the Fed and the SEC.
What happens if they never jump? Or if they do and the sharks get them? Well, here’s my view.
The government chokes down what it can, and does such a desultory poor job of it, that now these things are truly anathema. The beleif that they are bad, makes them worse. Real estate values drop. Mortgate rates go through the roof. It’s like Houston in the 1970s. People have houses with $500,000 mortgages that have a market value of $150,000. They load up the Ryder trucks and leave the keys in the door whether they can pay or not. Taxes go up, interest rates go up, inflation goes up. There is no new construction, few jobs, unemployment goes into the 20s and 30s. Those companies with some strength and people with means tighten up, dig deep, and prepare themselves for the long winter. Consumer Confidence drops to all time lows. Homelessness grows. People demand housing, medecine, and food from a government who’s debt is spiraling out of control, and can’t squeeze blood from the dead stone of the economy. Tangible assets represent the only real value, and in the throwaway era of Ikea, Gillette, and Bick, there is little of that.
It’s the great depression. Maybe not as bad. Maybe worse.
Don’t worry though. Somewhere out there, Mr. Big Stick Man is pulling at his ear hair and saying “I wonder if…”