Economy

Disclaimer: I'm not the smartest guy when it comes to the Economy. Admitedly there is a lot I don't understand. That said...

With all the doom and gloom talk over our current financial situation (bailouts, bank failures, etc...) there is a thread of conversation that I keep picking up on, and I have not heard anyone address this directly.

So this is how I'm hearing it stated...
The banks lent out lots of money via mortgages to people who could not afford them.
(lots of finger pointing as to why this happened. Some blame the people, some blame the banks... I blame the banks. If was out and out fraud on behalf of the people, then they should be prosecuted.)
So, now, the banks have loaned more money that they have. Because of that, the banks (and this is the key point) have stopped lending (even to other banks) because they don't have the cash.
This giant bailout, is to give the banks a pile of cash, so that they can again start lending.
So, here's the part that bothers me... you mean to tell me our entire economy could collapse because people would not be going into debt anymore?
I understand the importance of borrowing money in the form of a loan. people need certain items 'now' that they are willing to pay (in some cases HUGE) interest on. But there's something underlying all this economic talk that bothers me in the sense of keeping people in debt.
Is that what truly runs our economy? Is that why we're the 'richest' country in the world, because we have the most debt? Why does this seem backwards to me?
If someone can explain this to me in 'laymans' terms in a comment, I'm all ears. And thanks!

If nothing else, these bank failures and bailout talks have showed me one thing... I personally am SO FAR removed over any sort of decision making in this process, it's clear to me that class is a very important issue when it comes to this money aspect of America. I saw this recent chart, and it was another example of who could run our country. Who is more like me? (well, neither, I don't own a house, or a plane, or a bike, but I do own one car).
If we let a RICH person make the decisions, we the people will foot the bill and remain in debt. If we let an average guy (I know, Obama's got some $ too!), he (or she) might be willing to hold the corporate big wigs accountable.