Q&A: How will Wall Street crisis affect average Americans?

By Kevin G. Hall

Average Americans have a lot at stake in how the widening financial crisis plays out. Here are some answers to questions about it:

Q. What does all this Wall Street volatility mean to me?

A. If you have a 401(k), you shield some of your income from taxation through an IRA or a lot of your retirement savings are in stocks, you've already seen a sharp drop in the value of your nest egg. The Dow Jones Industrial Average is on pace for one of its worst years ever, but even if you've parked your cash in a bank, today's rising inflation is eroding its value.

Q. Is this like 1929, when the stock market's crash led to widespread bank failures and the Great Depression?

A. No. The interventions so far by the Federal Reserve and the Treasury, the existence of federal deposit insurance for national bank customer accounts and the willingness of Congress and the president to fight the downturn with fiscal policy all underscore that there are safety cushions in place that didn't exist 80 years ago. Still, today's financial turmoil could spread, and the economy could suffer more before stability returns.

Q. Will the collapse of Lehman Brothers make things worse?

A. It could, or it could make things better. The weekend meetings between top federal regulators and senior executives of Wall Street firms resulted in the surprise takeover of Merrill Lynch by Bank of America and a lack of suitors for Lehman. Some analysts feared a Great Depression type of financial-market meltdown Monday morning, but markets were orderly, not panicked, as news of the events sank in.

With the government-brokered sale of investment bank Bear Stearns in March, Bank of America's absorbing of Merrill Lynch and the bankruptcy filing by Lehman, Wall Street's weakest players have been pushed off the field.

Goldman Sachs, Morgan Stanley and JP Morgan remain the biggest traditional investment banks, and Merrill is expected to keep operating under its own name. The consolidation in investment banking has taken most insolvency concerns off the table, and over a longer horizon this could point toward a return to stability.