If the U.S. economy were a car, all of its warning lights would be flashing red.

The breathtaking collapse of investment bank Bear Stearns over the weekend is the latest — and perhaps the most alarming — indicator to flash on the economy's dashboard.

First, the crisis in subprime mortgages — loans to those with poor credit — infected the credit markets. Then home prices started sinking. Then mortgage defaults rose, and the economy began to sputter. Now, the Federal Reserve is desperately trying to stabilize the credit market before a failure of confidence can poison the entire U.S. financial system.

The latest sign that the financial system is close to overheating: Bear Stearns, once the country's fifth-largest investment bank, agreed Sunday to be sold for just $2 a share, down 93 percent from its closing price Friday.

The best-case scenario is that the Fed can get the financial markets humming again, leading to a recovery in the housing market and a resurgent economy. The worst case: an economic breakdown in which the crisis spreads to other banks, and beyond.

Bear Stearns failed because its investors no longer believed it could repay its loans — even its short-term, overnight loans. Even worse, investors concluded the bank no longer could stand behind the complex agreements it had with other financial institutions. And Bear Stearns had a web of intertwined agreements with other banks, investment houses and corporations.

The story of Bear Stearns isn't just a saga of a spectacular Wall Street failure. The company's failure signals far deeper problems with the nation's economy and raises questions about the consequences of Bear Stearns' problems for ordinary Americans:

Q. What is an investment bank, and why should I care what happens to one?

A. Unlike a commercial bank, which offers checking accounts, CDs and loans, an investment bank finances offerings of stocks, bonds and other investments.

Investment banks help companies sell their stock to the public and help cities and towns raise money by issuing municipal bonds. Investment banks also offer advice on corporate mergers and acquisitions. If investment banks can't function, the financial system could grind to a halt. Companies and municipalities would have a hard time raising money. Businesses would be unable to expand and create jobs.

Q. Does the collapse of Bear Stearns mean other investment banks are in danger?

A. It's difficult to say.

Although most investment banks are public companies, it's hard to tell precisely what assets they have on their books and what condition those assets might be in.

When a commercial bank fails, federal authorities have a good idea of its holdings and which of them can be salvaged. That's because commercial banks are regularly required to disclose troubled investments to regulators. Less scrutiny is required of investment banks and hedge funds.

Q. Is that why is everyone so worried?

A. Partly. But there are other reasons, too.

The collapse of an enormous financial institution stirs uncertainty, and uncertainty rattles Wall Street. Lenders are happiest when they are confident they will be repaid. If they think there's a chance that borrowers will default, they don't make loans. Their refusal, in turn, can shut down the economy and the financial system.

But the Fed did nothing Sunday that would alleviate the cause of the financial crisis: an economy that had binged on debt.

Q: How is this going to affect me?

A: Several ways. The yields on money market mutual funds and bank deposits will fall, as the Fed continues to cut interest rates. Stock prices will continue to be extremely volatile. And gold will rise in value, because many investors view gold as the ultimate haven.

The value of the U.S. dollar will continue to sag, thanks to lower interest rates. As interest rates here fall, global investors sell their dollar holdings to find investments with higher returns. That pushes the dollar's value lower — meaning Americans face higher prices.

Q. So it will cost more for everyday goods and for travel to Europe. How else does the falling dollar affect me?

A. The nation needs foreign cash to finance its gaping trade deficits. With private investors vanishing, that's left Uncle Sam increasingly reliant on foreign central bankers. January saw a net inflow of $75.5 billion from foreign governments. Among the biggest buyers: China, Russia and Middle Eastern oil exporters.

Those government investors are becoming more selective about which U.S. assets they buy. They're moving into supersafe U.S. Treasuries and moving out of just about every other type of investment. That shift is escalating the credit crunch, says economist Brad Setser of the Council on Foreign Relations.

For the United States, the danger is that foreign nations whose currencies are linked to the dollar, such as the oil-exporting Persian Gulf countries, will tire of the rising costs they are paying.

Q. So how serious is the financial crisis? Is there any risk of a full-blown depression (a severe downturn that lasts years)?

A. Hard to say. But it's no longer just hard-core gloom-and-doomers who are predicting dire outcomes.

"It's going to go from bad to worse. ... This is certainly the worst financial crisis in the last 50 or 60 years," says Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard.