With the failed banking and insurance industries, the fact exists that those mismanagement of funds by multi-billion dollar corporations has a trickle down effect on everyone, and ultimately the buck stops with us, the American consumer.  You should begin educating yourself and your family on what caused this to happen in the first place.  It will certainly help your family realize how to cope with this volatile economy and if you have kids, it would be a good idea for you to know what is going on so you can tell them what not to do.  So, I am going to make it easy by giving you a relatively simple explanation of what happened. 

Basically, lenders made poor decisions by selling mortgages to folks that couldn’t pay.  Borrowers also were in the wrong by taking on a mortgage they couldn’t afford.  Then, these bad mortgages were all packaged and sold in pieces as investments called “mortgage backed securities”.  Basically, these are securities sold by large investment banks to interested institutions and individuals at a discount, thinking that the housing market would recover and these low-priced bad mortgages would turn around and make lots of money.  However, that did not happen.  The investments instead started going down and all the institutions and individaul investors who bought these securities began losing their money.  However, a large percentage of these investors bought something called “Credit Default Swaps”.  These are marketed by the investment banks also as a type of “insurance” on these very risky investments like the mortgage backed securities.  However, credit default swaps are not called insurance because they are not regulated, therefore they call it swaps.  But, in theory, it works the same way and basically says that if someone buys one of these risky securities (i.e. mortgage backed security) and it loses money, then this credit default swap will be there to bail them out of their losses. 

Herein lies the problem.  The super huge investment banks and insurers (Bear Stearns, Lehman Brothers, and AIG) who sold these credit default swaps did not have the cash reserves in house to cover the severe losses.  Therefore, Bear Stearns went down, Lehman Brothers filed bankruptcy and AIG was bailed out by the federal goverment to the tune of $85 billion. 

Now, the bill was just passed a few weeks ago to bailout the financial institutions to the tune of $700 billion.  This is money that the federal government (your tax dollars) will pay to bail out these extremely irresponsible corporations for gambling on securities that were always too risky to bid on. 

Any average Joe can tell you that if you buy a house you cannot afford, then you will not be able to pay for it.  However, these multi-millionaires on Wall Street just could not figure that one out.  Again, there is much more to the financial crisis of our current economy, but this is just a brief breakdown for you to share with your family and friends.  And the best thing you can do right now is store cash.  Pay with cash and it is probably a good idea to stay out of the stock market for a while.  Just focus on getting out of debt, paying with cash and your family will be in great shape.