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Chapter 11: Austrians vs. Keynesians

Securitization is the process of repackaging loans
into a financial asset and dividing the asset into three
different tiers (called tranches) and then selling off bits
and pieces to investors. The best are in the top, and
high-risk loans are in
the bottom layer, the
toxic waste category. Securitization is the
Economists call this process of repackaging
collection of loans a multiple loans into a single
financial asset.
Collateralized Debt
Obligation (CDO) or
a Mortgage Backed Security (MBS) if the loans are
mortgages. Since banks sell their loans to Fan and Fred,
they are less concerned about the creditworthiness of
their clients.

THE FED TOOK ACTION in 2008

In 2008, the rapidly eroding confidence in the
financial system caused several major financial firms to
collapse. Banks and
insurance companies
Economists call these
faced bankruptcy, and
securitized loans a
p r i v a t e c i t i z e n s
Collateralized Debt
experienced enormous Obligation (CDO).
losses. Fearing that these
conditions could cause a
depression, the Federal Reserve took action to stem the
tide by doing business with Fan, Fred, and commercial
banks.
First, it agreed to purchase debt instruments from
Fan and Fred, and then it committed itself to exchange
billions of dollars of risk-free federal bonds for high-

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