Stock Markets Drop Sharply Worldwide
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JIM LEHRER: And, now, that plunge in the stock markets today. The Dow Jones’ drop of more than 400 points led to the index’s largest losses since September 2001.
And here to help us understand what happened and why is James Angel, who studies financial markets at Georgetown University. He has previously served as chair of the Nasdaq’s Economic Advisory Board.
Professor Angel, a simple question, difficult, I realize, but what did happen? Why did this happen?
JAMES ANGEL, Georgetown University: Well, the markets dropped substantially today all over the world. The sell-off started in China, where the Chinese index fell 8.8 percent. And when the U.S. markets woke up, they go, “Whoa, something bad happened in China.”
Now, China is so closely linked to the United States — they’re a major trade partner, they’re a major supplier of manufacturing goods, they’re a major holder of U.S. government debt — if something bad happens to China, something bad is going to happen to the United States.
The Chinese loss
JIM LEHRER: Well, let's start there. What happened in China to cause that to happen in the first place?
JAMES ANGEL: Well, the Chinese market has been on a tear in the last year. The market has more than doubled in the last year.
JIM LEHRER: Doubled in value, gone up?
JAMES ANGEL: Yes. Yes. And the day before, it had reached a brand new record high. So it looks to me like a classic "end of a bull run" correction, in which the markets often act like Wile E. Coyote in the old Road Runner cartoons.
Remember how Wile E. Coyote would run over the cliff, and then suddenly it drops. Well, the markets have gone up so high, so fast in China that suddenly people have gone, "Wait a minute, maybe it's gone a little too far," and they're rushing for the exit.
JIM LEHRER: But, in other words, it was a natural correction. It wasn't anything gross or traumatic that happened in China that caused this specific thing to happen?
JAMES ANGEL: Well, there are a few things going on. There's been some speculation that the government would try to tighten up on the speculation in the market.
JIM LEHRER: I see.
JAMES ANGEL: The Chinese government is very concerned about the level of speculation, and they may be taking some steps to try to sort of dampen the speculative fever that's been going on.
Factors in U.S. plunge
JIM LEHRER: So that caused that. Now, then come to the United States. There were other things at work, were there not, in addition to the China thing that caused this thing in the United States?
JAMES ANGEL: Yes. Among other things, Alan Greenspan recently used the r-word, the recession word, in a recent speech.
JIM LEHRER: And he's now the former head of the Federal Reserve.
JAMES ANGEL: Right, he's the former head, but he still is seen as somebody who really understands how the world works. So a lot of people listen to him.
So we have the events in China. We have the continuing bad news in the Middle East. So you can understand how there would be a correction, because the U.S. market has also been at record high levels, as well.
'Near the end of a bull run'
JIM LEHRER: Now, everybody is always talking about the psychology of the market. Was that at work here, too, or was it -- were real things happening and caused real people to sell real stocks for real reasons?
JAMES ANGEL: Well, it's a little bit of both. The markets are linked, so, with the downturn in China, that would imply that the cost of capital has gone up a little bit in the U.S., as well as China, so there are some legitimate linkages there.
But also, to a certain extent, when you're near the end of a bull run, it becomes a game of musical chairs, of the people who are on it for the...
JIM LEHRER: Bull run means the stocks are going up. Everything is going up, and everybody expects it eventually either to level off or go down eventually. It has to. That's what everybody thinks, right?
JAMES ANGEL: Yes. Yes. And so if they think that, "I'm going to be the first one to jump off while the getting is good," you have a mad rush as everyone rushes for the exits at the same time.
A technical glitch
JIM LEHRER: Now, speaking of that, there's one little thing that we still don't have the full explanation of. I've been looking at the wires even as we began to talk here.
And the Dow Jones has said there was a technical glitch mid-afternoon, sometime around 3:00, that caused this. I think it was like the Dow was down 280-some points. And then, boom, within a couple of minutes, it was down 500, and it could have been the result of a technical glitch. Do you have any idea what that might be?
JAMES ANGEL: Yes. My understanding -- and we're still getting information on this; we don't know exactly what happened -- is that there was a computer glitch in how they reported the numbers.
So they started putting out numbers which may not have been correct, but then there are so many program traders and so many computers that are linked to those numbers that, when they saw those numbers falling, they started putting in orders reacting to those.
JIM LEHRER: And the orders were just -- some of them would have come in automatically based on the numbers, right? Is that how that works?
JAMES ANGEL: Yes. Yes. So we don't know exactly what happened, but it looks like there was some kind of computer glitch involved.
JIM LEHRER: Finally, should this be viewed by the professionals, meaning everybody who owns stock.... as a one-day bad day or something more?
JAMES ANGEL: Well, time will tell. There have been 195 of these bad days since 1928. Sometimes they're a temporary glitch that, like this afternoon glitch, disappeared quickly, and sometimes they're a harbinger of worse things to come. Time will tell.
JIM LEHRER: And we'll know a little bit, like, say, at 9:00 a.m. tomorrow?
JAMES ANGEL: Well, 9:30 is when the market...
JIM LEHRER: 9:30, right, 9:30. They have the advance stuff, and 9:30 is when the market actually opens.
JAMES ANGEL: Well, we'll know a little bit more when China wakes up tonight. And we'll also see the futures coming in before the open tomorrow. So, yes, by 9:00 we should have a feel for what's going on.
JIM LEHRER: OK. Professor Angel, thank you very much.
JAMES ANGEL: Thank you.