Q&A: economy in crisis: the meltdown on Wall Street and Washington's rescue plan left many Americans worried--and scratching their heads. Here are some straightforward explanations to help you make sense of what's happened and where we go from here.

• Author: Smith, Patricia
• Position: Cover story

WHAT CAUSED THE MELTDOWN?

The roots of the crisis lie, ironically, in the housing boom of the late 1990s and the early years of this decade. A strong economy and low interest rates meant that it was much easier for people to get mortgages to buy homes.

The problem is, a lot of people who bought real estate probably shouldn't have--including investors who thought prices would keep going up and they'd be able to sell at a profit, and fast-time home buyers who couldn't really afford their mortgages. At the same time, mortgage lenders lowered their standards, granting loans that they probably shouldn't have made.

It was all fine until two years ago when the housing bubble began to lose air and real estate prices started falling. That made it harder to sell a house, and for the millions of people with adjustable-rate mortgages whose monthly payments went up, it became harder to keep up the payments on the houses they owned. Foreclosures began rising. (See Voices, p. 9.)

HOUSING BOOMS AND BUSTS ARE NOTHING NEW. WHY DID THIS TURN INTO SOMETHING MUCH BIGGER?

What's different is the way banks handle mortgages today. It used to be that a bank gave you a mortgage for a house, and every month you paid a little bit back, with interest, for 30 years, until it was all paid off.

In recent years, banks found it more profitable to take thousands of mortgages and bundle them together into something called "mortgage-backed securities" that can be sold and traded--like a stock or bond--to other financial institutions. That explains why when your parents pay their mortgage, they may write the check to several different entities over the years--to whoever "owns" the mortgage at the time--even though you're still in the same house.

When homeowners began defaulting and foreclosures rose, these mortgage-backed securities were suddenly worth a lot less. What made it scarier was that no one seemed to know how much less, because these investments were so new and complex.

If you can't figure out what something is worth, no one will buy it, and that's exactly what happened: The market for these "toxic securities" simply dried up, Wall Street panicked, the stock market tumbled, and some of the banks and financial institutions that owned these securities went bankrupt or were taken over by the government.

SO A LOT OF BANKERS ARE HURTING. BUT WHAT DOES THAT HAVE TO DO WITH EVERYONE ELSE?

Whether it's fair or not, when Wall Street suffers, so does the entire economy...