Wall Street hit a snag on Monday.

And when it ripped on the nail protruding from Wall Street’s major problems in the housing and financial markets, more than 500 points fell from the Dow and about 50 fell from Nasdaq.

Michael Walden, an economist and professor of agricultural and resource economics, said Monday’s pullback was a reaction to two factors. The first was that Lehman Brothers Holding, LLC, a bank that has been in operation since 1850, declared bankruptcy.

The second results from financial conglomerate AIG’s announcement of “large financial problems” and a “need to raise large amounts of money,” Walden said.

But Walden said problems in both of these companies relate back to large-scale obstacles within the housing and financial markets that have been building up since 2004.

Although some economic forecasters predict a domino effect that will trigger other economic pullbacks until 2011, Walden said he believes the market will rebound next year, just in time for some students’ graduations.

After a spike in mortgage rates in 2000, rates consistently dropped, eventually landing at about 5 percent in mid-2003.

And people took advantage of that, Walden said.

Those who couldn’t afford high interest on mortgages in the earlier part of the decade began buying homes at lower interest rates.

Banks like Lehman Brothers turned their attention toward this new, expanding market.

“There were substantial amounts of money that banks lent to home buyers,” Walden said.

But at the end of 2003, rates began to jump back up.

“Many of those people who were just able to make payments by the skin of their teeth — these are payments at low interest rates — can’t make payments when rates are higher.”

So borrowers couldn’t afford their bills — it’s an issue that lenders can fix by repossessing homes purchased with their money.

It wasn’t that easy.

Due to the state of the housing market at the time, the value of a home bought a year or two earlier decreased.

“If an individual borrowed $200,000 from a bank and wasn’t able to repay it, you might think the bank could just come in and take that $200,000 house,” Walden said. “But the house is not worth $200,000 anymore. It’s worth $150,000.”

Either way, Walden said, the lender gets stung.

“What they lent out, they’re not getting back,” he said. “When you’re making a loan and it’s not repayed, that’s a cost to you.”

Because banks took such risks lending money to those who had no way of paying them back when confronted with higher interest rates, they lost big when Bank of America bought investing giant Merrill Lynch, Lehman Brothers declared bankruptcy and AIG announced its financial turmoil.

“In the case of Lehman Brothers, they have in their basket of investment high exposure to mortgages, and they have been caught by the problem with mortgages,” Walden said. “AIG is slightly different. It is more involved with the insurance end of it.”

According to the New York Times, the Federal Reserve agreed to loan $85 billion to AIG Tuesday night. The decision followed the Treasury’s takeover of Fannie Mae and Freddie Mac, the nation’s largest and second largest mortgage buyers, respectively.

“This is unusual,” Walden said. “This is probably the biggest shake up in the financial services sector we’ve seen in 70 years.”

He said that although these occurrences have had a large effect on the economy and the stock market, they don’t reflect the health of other banks.

“Not all banks are teetering on the edge of extinction,” he said. “The main drive of those banks that are having problems is the housing market and mortgages related to the housing market.”

The housing market is still part of a greater economic slowdown, which includes fewer jobs — the unemployment is up nationally by .4 percent to 6.1 percent, according the Bureau of Labor Statistics — low house values and little construction of new homes. Some economists, he said, predict the economic downturn will persist through 2010 and into 2011.

Optimists, he said, think it will end sometime next year. Walden lies in this group of economists.

“You have to pick your forecaster,” he said.

For the economy to get better within the next year, he said more homes must be sold, bought, built and paid off.

If it lasts through 2010, “it will probably mean the overall economy will be weak through that time period,” he said. “If it’s a lasting problem, that increases the chance that it will pull in other industries. You’re looking at a very sluggish economy for that period of time.”

Despite who the forecaster is, Walden said the country won’t see anything like the Great Depression, a time in which 25 percent of people were out of work and the stock markets crashed.

“We’re much more protected against that,” he said. “We’re nowhere near that, and I don’t expect we ever will be.”

He attributes the economy’s resilience to a flexibility in the way businesses can move people and money around — because “we’re tied into an international economy,” he said, and it’s one that is doing well for the United States — and also to Great Depression-inspired federal insurance on banks and stocks.

“We have institutions set up during the Great Depression that will service us now to mitigate the financial effects that we’re seeing.”

But for the moment, Walden said students may be hurt by the effects of the economic slowdown. Higher unemployment rates and a lessened value of stocks aren’t going to help students pay either their expenses or their ways through college.

His economic forecast, though, predicts that “the job market in two to three years will be improved over what it is now.”