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

By Kevin G. Hall

Q. What about the shorter horizon?

A. The chief executive officer of Bank of America, Kenneth Lewis, said Monday that he didn't see the clouds parting for his industry until 2010. Banks that still have exposure to the complex mortgage bonds that are at the heart of the crisis continue to get hammered. That includes Charlotte, N.C.-based Wachovia and Swiss giant UBS.

This financial crisis is still rooted in bad mortgages that were packaged into bonds and sold to investors. As long as home prices keep falling, investment and commercial banks that own vast piles of those bonds will keep taking write-downs and their bleeding will continue.

Q. How do these banking-sector problems affect me?

A. Problems in the banking sector spill into the broader economy. As these complex Wall Street investments sour, banks need to keep more capital on hand to assure investors that they can weather any future losses from loan portfolios. That means banks are playing defense.

If you want a business loan, a car loan, a home loan, a student loan or virtually any other kind of loan, they're hesitant to lend, lest they wind up with more bad loans. With lending drying up, auto dealers are sitting with inventory they can't move and real estate agents are showing homes they can't sell. The economy is slowing as credit is squeezed.

The crisis feeds on itself. As banks and corporations are perceived to be short of capital and their stock prices fall, their need to raise capital grows even as lenders are defensive. That forces them to sell assets at low prices, and it becomes a vicious circle. That's what insurance and finance giant American International Group now faces.