In the banking crisis of 2008, banks and investment firms would often bundle together home loans into a single fund, then sell shares of that fund to other
investors. By bundling the home loans, the individual risk of each loan was
effectively diluted and spread out amoungst all loans bundled into the single fund.
As the economy started to fail, homeowners would lose jobs and be unable to pay
on their home loans. This, in turn, caused the bundled funds to fail, and investors
lost money. As investors lost money, the investment firms began to fail. This lead to
a chain reaction because of the way insurance companies, banks, and investment
firms all were intertwined.
What would you do if you were King of the Economy, to prevent these failures?