Debt bubble part 1

Cliffsnotes (I'm doing this to make sure that I have my head around the issues). Still lengthy:
Definitions:
-- Borrower: borrows money to buy stuff (could be citizen, could be a commercial venture).
-- Lender: loans money to borrowers.
-- Investor: Has money to loan to lenders or buy securitizations from lenders
-- Securitizations: some group of loans that is sold by lenders to investors.

When a lender makes a loan, the loan reduces the lender's ability to make another loan. If the lender can sell that loan to an investor, then it allows the lender to make another loan. Lenders like to do this because a large part of their profit comes from the fees that they charge to make a loan. It is not at all like the olden days when lenders would make their profits on the spread between the interest that they paid to their depositors and the interest rate that they charged on the loans.

For reasons that deserve their own Ciffsnotes, these securitizations became very popular with investors. This means that lenders were able to sell as many of them as they could create. We experienced a deterioration in quality of all types of loans, but especially loans that were made against residential real estate. Since the so-called sub-prime residential real estate borrower was the first to experience distress and start defaulting in large numbers, this unwinding debt bubble has been labeled a sub prime crisis. It is, in fact, a debt crisis. Poor quality loans were made against a wide variety of asset classes.

In order to understand why this is a large problem for us today requires an understanding of fractional reserve banking: http://en.wikipedia.org/wiki/Fractional_reserve_banking. In short, this means that because the lenders were able to sell their loans to the investors, they were able to “create” more money than would have been the case had they just held those loans on their balance sheets. This additional money creation supercharges the economy when the debt bubble is inflating but (gotta choose the right verb here) enhances the deceleration in the economy as the debt bubble deflates because money is being destroyed more rapidly then would have been the case had not so much money been created.

Now, just how dependent we are on supercharged debt/money creation and how bad will it be when the debt/money is being destroyed is a topic for vigorous discussion in a variety of forums. Your decision on this issue will have an important impact on how you decide to invest in the weeks, months and years to come.