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PHILADELPHIA (CBS 3) ― It's the economic crisis everyone's buzzing about, but does the federal debt bailout plan mean doom and gloom for the average American consumer/investor?

CBS3.com Digital Journalist Nicole Brewer sat down with Temple University Associate Professor of Finance Jonathan Scott to answer a few questions about the current state of the economy and whether or not there is any light at the end of the tunnel.

Below you will find a list of 'Frequently Asked Questions' regarding our economy as well as answers provided by Professor Scott:

CBS3.com: How bad is the current state of our economy?

Professor Scott: This is the worst financial crisis since the Great Depression and certainly larger and more widespread than the thrift crisis of twenty years ago. The cost will be staggering, a total bill that may be close to $1 trillion. 

CBS3.com: How did we get to this point?

Professor Scott: Ultimately, what we have is the accumulated unintended effects of a deregulation process that began almost thirty years ago. Basically, consumers (especially retirees) wanted to be able to earn market rates of return on their deposits instead of regulated deposit rates at banks. Then, businesses wanted to be able to access funds outside the banking system. Finally, government embarked on a regulatory philosophy built around a concept where "markets" would allocate resources better than government. 

CBS3.com: So, in your opinion ... the downfall of the market can be attributed to government, business and people. So, what went wrong?

Professor Scott: The tipping point in this deregulation process has been the significant borrowings by many large financial institutions – especially sub-prime loans. This process worked fine as long as the purchaser could assign a reasonable value to the securities based on expected defaults and foreclosures – something not unusual for these types of mortgages.
Only when property values started falling and default rates soared to levels investors had not thought possible did the problems begin. 

CBS3.com: Did this contribute to the recent demise of many large financial institutions?

Professor Scott: This phenomenon eventually brought down Lehman Brothers and led Merrill Lynch into the arms of Bank of America – and generally restricted lending among banks worldwide because of concerns about the writedown of loans and its affect on the viability of the bank. 

CBS3.com: What advice do you have for the average consumer/investor? 

Professor Scott: For most consumers/investors, the best advice is to do nothing. There have been many financial "bubbles" throughout history – remember the Internet bubble? Financial markets adjust, often too overshooting the right level, but always recover. Investing in the stock market is the only viable way to have sufficient wealth to enable a comfortable retirement. 

CBS3.com: Are my deposits safe at my local bank?

Professor Scott: Your deposits are safe at your bank. Very few banks have significant exposure to sub-prime loans – and those that do – will be taken care of by the banking regulators. The FDIC has multiple sources of funds if their current holdings are insufficient. It is important to remember that not a single depositor in failed thrift or banks in the late 1980s/early 1990s lost a dollar of their deposit. 

CBS3.com: Should I move balances from my market mutual fund?

Professor Scott: You do not need to move balances from your money market mutual fund. The Treasury implemented a program last week that insured all money market balances as of last Friday, September 19. 

CBS3.com: Will it be more difficult to get a loan?

Professor Scott: You may find that it is more difficult to get a mortgage or auto loan relative to the easy (or some would say non-existent) standards of several years ago. Financial institutions are going to be reverting to underwriting practices that served them very well up until this latest crisis: higher downpayments (twenty percent will be preferred) and limits on mortgage payments and total debt as a percent of gross monthly income (about 25% and 35% respectively). 

CBS3.com: Should I use the low purchase price of certain stocks to jump start future gains?

Professor Scott: You should not be buying one thousand shares of Fannie Mae or Freddie Mac stock at under $1.00 per share because you think it will double in price. After all, these stocks were trading in the $60-$70 range a year ago. The reason they are below $1 per share is because there is a great deal of risk involved. 

CBS3.com: What kind of tax/interest rate surge can I expect going forward?

Professor Scott: You should be prepared for higher taxes and/or higher interest rates. The stock market did not react positively to the bailout plan today because someone has to pay for cleaning up this mess. That someone is you. The Treasury will have to borrow the money and compete with other companies for funds. The total cost may be lower based on how much the Treasury can recover from bad loans that they are going to buy from financial institutions. 

CBS3.com: Should I make any changes to my investment portfolio?

Professor Scott: You should review your investment portfolio at year end and consult with a financial advisor about the structure of your portfolio. The stock market has done quite well over the last twenty years – but not so good over the last 8 years. You need to make sure you have the right balance between stocks, bonds and cash. 

You also need to be realistic about what rate of return you expect you can earn on your portfolio. The returns earned over the past fifteen to twenty years are not likely to be replicated in the future. For most of us we will need to save more or work longer. 

CBS3.com: How can I protect my retirement portfolio for the future?

Professor Scott: A number of insurance companies and banks offer products that provide a floor on your income with the opportunity to appreciate with the overall market. These products are not cheap, but no insurance is free.

(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)

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