The need for government intervention in the financial markets is real, regional bank officials said Tuesday.
At the same time, the public needs to understand that the current financial upheaval likely will not affect people's lives as they live them now, said Pete Waller, First National Bank of the Rockies chairman, president and chief executive officer.
"When you listen to the national news, you hear these problems kind of generically referred to as problems with the banks," Waller said. "The current crisis is an investment bank crisis. The commercial banks, such as ours, didn't make these subprime loans."
Ninety-eight percent of commercial banks nationwide are "well-capitalized," he added, which means they have the highest level of cash backing government regulators acknowledge.
John Stafford, vice president of corporate communications with Bank of the West, said people don't have to worry about their accounts evaporating as a result of Wall Street's problems.
"ATMs are going to continue to work, and cash is going to continue to flow," he said.
However, both cautioned that if the government does not act to lift the glut of bad investments from the market, then an average person's access to loans and their own investment capital will be greatly reduced.
On a simple level, commercial banks operate by accepting deposits from residents and businesses, then lending that money out. The bank makes a profit by collecting interest from loans and buying low-risk investments with money leftover.
Investment banks operate by raising cash through selling stocks and then use the money to buy into other investments, such as mortgage loans.
Now, investment banks are stuck with investments - mortgage loans and property - that no one wants to buy. They can't raise cash by selling their investments, and people aren't buying stocks because they have too many bad investments.
Investment banks then fold because they don't have cash to spend to make profits, maintain operations or pay existing loans to other banks.
With banks not lending to one another, they also don't have the requisite access to cash to approve other loans, such as those from citizens and small business owners, Waller said, which is the problem federal legislators are arguing about in Washington.
Supporting the bailout
The government needs to act before residents and businesses find it impossible to secure loans, Waller said.
Stafford agreed, saying "government activism" was necessary to stop a "spiraling crisis."
Without access to loans, many residents would find it impossible to afford big purchases, such as buying homes and sending kids to college, he said. Businesses would find it difficult to expand, and many entrepreneurs wouldn't be able to open new businesses.
Without people investing in large purchases - which create multiple jobs - and without business investment - which also creates multiple jobs - the economy as a whole will start to suffer.
Waller and Stafford said U.S. Treasury Secretary Henry Paulson's plan to spend $700 billion to remove bad investments from the marketplace and provide investors and banks with cash will alleviate the credit problems before they affect average citizens.
The U.S. House of Representatives voted the current bailout package down Monday. The U.S. Senate plans to look at a different form of the plan later this week.
It is not a total bailout for bad investments, Waller said. The government will not pay back investors 100 percent of what they spent. It will pay a reduced price, then sell the investments when the market recovers.
The plan also probably will not hurt American taxpayers in the long run by increasing inflation or weakening the dollar's value, Stafford said, despite putting a huge cash sum into the market.
The money is not new money, it is replacing currently held and paid for investments, Stafford said. Although it may increase inflation a little bit domestically, the boost in international confidence in the U.S. economy will strengthen the dollar's value.
Who to blame
There is no one group of people to blame for the financial crisis, Waller said.
"It is not a George Bush phenomenon, and it is not a result of the last two to three years," he said. "This has been brewing for decades."
In 1978, the federal government started using financial regulations and legislation for "social engineering," Waller said. It mandated that banks allow people to enter into homebuyer loans for houses they couldn't afford.
Waller said the simultaneous pushes to deregulate financial markets until unlicensed real estate brokers could sell false mortgages, and then to also regulate the market and force banks to approve bad loans, have gotten the country where it is now.
Again, he stressed, although Wall Street is forever changed, most average people will not see much difference between October 2008 and October 2006. The last thing people should do is panic.
"That's the last thing we need, for fear to take hold in the real America," Waller said, adding that fear will do far more damage to the economy than Wall Street. "Things are going to be OK, but it's going to take a little while."