I'm confused. if the default handle in page.xml defines the default page layout. How come when you first install magento. Its set as 3 column layout but the front page is a 2 column
Hmmm... not so sure... If you install Magento from scratch with the default template, the home page is a 3 column layout : http://demo.magentocommerce.com/
Anyway, if you see a template that has a 2 column layout whereas the default layout of catalog.xml is a 3 column it certainly means that there is a custom layout in the CMS page of the home page.
In the backend, see CMS > Pages > Home. Then on the "Design" tab, you may find that the "Layout" dropdown is set to "2 column with [...] bar". Setting it to "3 columns" would do the trick.
To put it theorytically (is that good English ?!) : xml layout files are used for generic layout for each area/module of the site (catalog, customer, checkout, search...) but can be overwritten on a per-page basis thanks to the Custom Layout feature that you will find in CMS Pages, Categories and Products edition pages.
Layout is the tool with which you can assign content blocks to each structural block you create. Layout exist in the form of XML text-file and by modifying the layout you are able to move blocks around in a page and assign templates to the content blocks to produce markup for the structural blocks. In fact, with the help of a few layout files alone, you are able to modify the visual layout of every page in your store. Read further about layouts in Intro to Layouts.A default layout (page.xml) is the layout that by default applies itself to almost every page in the store. All other layout files are Layout Updates that simply updates the default layout on a per-page basis. Have a look at designers guide to magento book. It will help you to understand the working of layouts more clearly.