TOPICS > Economy

Business Experts Discuss Effects of Market Swings

August 16, 2007 at 6:15 PM EDT

JEFFREY BROWN: “Markets are rattled,” that’s become a daily mantra of the news coverage again today, and most of that bad news has focused on large financial institutions: hedge funds, mortgage loan companies, and others. The growing concern now is how much all this is hitting the general economy.

We take a partial snapshot around the country with four business writers: Kim Blanton is a reporter at the Boston Globe; Loren Steffy is a columnist at the Houston Chronicle; Daniel Howes is a columnist at the Detroit News; Kathy Kristof is a reporter and syndicated personal finance columnist at the Los Angeles Times.

Well, Kim Blanton, I’ll start with you. To what extent are the woes of Wall Street hitting Main Street in your region? Is it still mostly in the housing market?

KIM BLANTON, The Boston Globe: Yes, it is mostly in the housing market, but I think there’s really a concern it’s going to spread into the business sector. You know, I think today, with all the problems of Countrywide, the biggest learned in the country, people are really sitting up and saying, “Wow, we have some serious problems here in the credit markets.” And I think there’s a concern that it’s going to hit business, not just the housing sector.

JEFFREY BROWN: Staying with the housing, staying with you for a moment, most of the attention, of course, has been on the riskiest loans, the so-called subprime mortgages. Has it spilled over into the larger housing market?

KIM BLANTON: Oh, absolutely. Jumbo mortgages that are over the size where the federal agencies, Fannie Mae and Freddie Mac, will buy the mortgages are now very hard to get or they’re very expensive. I heard some banks in Massachusetts are charging 9 percent for those loans.

And, remember, somebody buying a big house is probably somebody with a good amount of income, but the investors in mortgages who are a major source of funding for the mortgage market are saying, “I don’t want anything if it isn’t somehow government-backed or if it’s even a little bit risky.”

So mortgage loan rates or interest rates are going up quite a bit, and it’s just scaring off buyers. Now buyers are saying, “Hey, I’m going to wait and see if prices go down more before I even buy.” So it’s really rippling through just the whole housing market and the whole lending industry, not just the subprime.

JEFFREY BROWN: Loren Steffy, what do you see in Houston? How much concern are you hearing about what’s going on in Wall Street and translating into Main Street?

LOREN STEFFY, The Houston Chronicle: Well, there’s a growing amount of concern here in Houston, but we have some benefit over what Kim’s talking about in Boston, because housing prices in Houston are so much lower than what you have on either coast. The average home price in Houston is about $155,000.

So even though we’ve had a lot of subprime activity, we had a lot of concern about adjustable rate mortgages, we didn’t have the huge run-up in prices that you’ve had in some other parts of the country. And so the slowdown hasn’t been as severe here as it’s been in other places.

JEFFREY BROWN: And do you see it growing into other sectors beyond the housing sector at this point?

LOREN STEFFY: Well, that’s the big concern, obviously. Housing is a big industry. Houston’s had a lot of growth in the last few years, and there’s a concern about the ripple effect. How will this affect, you know, home improvement companies and things like that?

There’s also a lot of concern about the mortgage industry itself. There’s been several big lenders that have had either operations here that were based here that have either stopped making loans or filed bankruptcy in recent weeks, and that’s had an impact on employment. So there’s kind of a growing concern that this could spread out beyond simply the housing market and have a broader impact.

One more problem in Michigan

Daniel Howes
The Detroit News
I had a long discussion with one of the senior executives in one of the companies earlier this week at dinner, and he said one of his biggest fears is what this credit crunch is going to mean for the car business and for them coming back.

JEFFREY BROWN: Daniel Howes in Michigan, things there have been pretty bad for a while, right, so you're in a slightly different position?

DANIEL HOWES, The Detroit News: They've been very bad for a very long time. And I think -- somebody asked me about this earlier today, and I kind of liken this to asking somebody who's got a nail in their head how they feel about the itch on their shoulder. I mean, this is just one more thing, one more layer of the onion for us here in Michigan.

I think really the biggest concern is what this may do to auto sales. Detroit's car companies are clearly, if not on their backs, certainly on their knees, and are trying to get up, and are showing some signs of doing that. I had a long discussion with one of the senior executives in one of the companies earlier this week at dinner, and he said one of his biggest fears is what this credit crunch is going to mean for the car business and for them coming back. It's a real concern for them. But you know...

JEFFREY BROWN: How does -- excuse me, how does it exactly translate from what we hear every day on Wall Street to car sales?

DANIEL HOWES: Well, fundamentally it's consumer confidence. And it's people who feel that they are poorer because all of a sudden their house on paper is worth 5 percent, 10 percent, however many percent less.

Now we, like Houston, we've not had the run-up here in housing prices for some period of time, and we've been kind of all looking at ourselves and saying, "You know, we can't sell our houses." People have been taking buyouts at car companies and they can't leave because they can't sell their homes. And this is just going to exacerbate that.

But I think the bigger question is what this does to the overall economy. To some extent, we kind of feel like people are going to be catching up to us, where we've been, but our overall economic picture I think is much bleaker. And clearly, in terms of housing prices and value declines in Michigan and Ohio, really the Great Lakes states, and Florida as an outlier, kind of lead the declines.

High-end market of Los Angeles

Kathy Kristof
Los Angeles Times
I spent the whole morning talking to individual investors, and they're doing exactly what they ought to be doing, which is absolutely nothing.

JEFFREY BROWN: All right. And, Kathy Kristof in Los Angeles, what are you seeing there?

KATHY KRISTOF, The Los Angeles Times: Well, we're hoping not to catch up to Michigan.

JEFFREY BROWN: Yes, that's a race you don't want to win, right?

KATHY KRISTOF: That's definitely a race we don't want to win. But, yes, we have a very stratified market here. And we have a high end that seems to still be doing OK, and we have a low end that is in the depths of despair, and then we actually are already seeing consumer spending dropping. We're seeing real estate sales declining, but, again, in a very stratified way. The low end of the market is dead; the high end of the market, where people have lots and lots of cash, that's still going on.

But as you were saying just a second ago, one of the worries that you have with this market is, when the stock market is high and when real estate prices are going crazy, there's a wealth effect. And everybody feels wealthy and therefore they don't have any problem going to the mall, they don't have a problem buying a refrigerator or a car. They replace things that aren't really completely worn out yet.

And so much of the economy hinges on consumer spending. Now, when you have both your house price dropping and your stock market portfolio dropping, now all of a sudden you have a poverty effect. And the question is how the consumer is going to react. Are they going to stay out of the mall? And if they do that, then this gets a lot more severe.

JEFFREY BROWN: Well, I was wondering, because I know you do write a personal finance column. Do you sense that small and average investors are a little more patient nowadays because we've -- I guess people have more experience in the market over the last several decades, actually. We've seen a few ups and downs. Do you think people are a little more savvy and a little more patient or not?

KATHY KRISTOF: I spent the whole morning talking to individual investors, and they're doing exactly what they ought to be doing, which is absolutely nothing. The professional investors are in their, you know, trading frenzy, not knowing whether to buy or sell or stay put.

But the individual investor has been pretty calm through all of this. And I think, for the individual investor, that's smart, and that's what we're seeing. That's exactly the right approach.

The issue, again, is going to be whether this leeches into the economy as a whole, and then where you'll see the individual investor or the individual having problems is if this slows the economy, causes layoff, and then causes a real hit to your pocketbook.

Impact on employment

Kim Blanton
The Boston Globe
[A]ll of this stuff going on, on Wall Street, is not yet I think leading to any layoffs at these big financial companies, but all these mutual fund companies that we have [are] losing in the stock market suddenly.

JEFFREY BROWN: Well, Kim Blanton, you talked about the housing market there in Boston and the larger New England region. To what extent is this hitting other businesses? Someone raised the job question issue, the j-word here. Do you see other sectors, other businesses being hit already in ways that could lead to impact on the job market?

KIM BLANTON: Well, the most obvious thing for Boston is really our financial industry. I think we probably are second to New York in terms of the size of our industry. We've got enormous mutual funds companies here, like Fidelity, that everybody has got some money probably in -- a lot of people have money in Fidelity. You know, Bank of America has a huge operation up here, having taken over one of our local banks.

So, you know, all of this stuff going on, on Wall Street, is not yet I think leading to any layoffs at these big financial companies, but all these mutual fund companies that we have, you know, they're not making as much -- they're losing in the stock market suddenly. Maybe they decided they're not going to hire people, or even they may even lay people off. It depends on what happens to the market. So the financial sector here, which is I think about 7 percent of our economy, is a real center of concern right now.

On the other hand, we have a high technology sector that has been going like gangbusters. We were involved in the 2001 high-tech boom, and then the economy really crashed after the dot-com crash. We went down with it. We finally started recovering this year, and we've had some pretty strong growth here because of high tech.

And I think the fear is the uncertainty that your other guests have talked to you about, the way the consumers are feeling -- they don't have as much home equity. Maybe their investment portfolio is less, they're going to spend less money, and the housing market and possibly the financial industry. So how these things all weigh out, we can only sit by and watch them happen, I guess.

Anxieties over the long term

Loren Steffy
Houston Chronicle
One of the advantages that we have here in Houston is, of course, there's an awful lot of energy companies either based here or that have very large operations here. Energy prices have been strong.

JEFFREY BROWN: Loren Steffy, what specific businesses or corporate sectors is everyone watching down there to see how this shakes out?

LOREN STEFFY: Well, aside from the direct impact on the mortgage companies and a few sort of directly related industries, like I mentioned before, there really hasn't been sort of a widespread concern. One of the advantages that we have here in Houston is, of course, there's an awful lot of energy companies either based here or that have very large operations here. Energy prices have been strong. Refining margins have improved dramatically in the last few years, and so really, from that standpoint, the overall employment picture in Houston remains pretty strong.

JEFFREY BROWN: Daniel Howes, you know, we've talked for many years now about globalization and the anxieties raised for Americans over loss of jobs. Do you see this -- because you were talking about the long-term impact, economic downturn there. Do you see the current ebbs and flows on Wall Street playing into those larger factors, or is this a very specific and narrow concern that people have now?

DANIEL HOWES: Well, I think as we've all discussed, I mean, it is specific, but it could become very broad, depending on how all this plays out and the psychology. As I was listening to Kim talk about this, you know, you think about the psychology of how people react to all of this is clearly going to have to play out. And we really don't know how it's going to be and how much people psych themselves up or out of this whole situation.

But insofar as globalization in the industrial sector and in Michigan is concerned, it's continuing apace. I mean, you've got companies like General Motors that are building more cars over the last several years, have built and sold more cars outside the United States than they have inside. And we're four weeks away from the end of watershed negotiations with the United Auto Workers.

And I think one of the things you're going to see is, if they don't dramatically reduce the total the labor cost -- and I don't mean wages; I mean the total labor cost for these companies -- you're going to see a continual migration of production outside the United States to Canada and Mexico and other places around the world. These companies are living on a knife edge, and they're going to have to do something differently to survive.

My own view, of course, as you would think I would say this, is that I think it's important for some American-owned car companies to survive, but they have to do it the right way, and they have to be competitive. I don't think there's any question about that.

But right now, I don't really see that these two things are linked, but I will tell you this: If this does really impact sales, I think some of the doomsday scenarios that we've seen playing out could come to pass.

It's important to note Ford Motor Company has mortgaged every asset it has in the United States. It is totally, totally maxed out. And if things turn negatively in a way that they did not anticipate, we don't know what will happen. And I think Chrysler also is in a difficult situation.

JEFFREY BROWN: All right. Kathy Kristof, we just have a minute. A doomsday scenario was just raised. Does it feel that way where you are?

KATHY KRISTOF: It definitely does not feel like doomsday at the moment, but then, of course, we're the heart of Hollywood. So when things are really bad in the rest of the country, people move to entertainment. And so probably in Los Angeles, there will be a boom.

But I actually -- I think that this is going to be contained. I actually think, by the end of the year, things are going to look a lot better than they do now. I think the underpinnings of the economy are a little bit stronger than we might worry that they are.

I think the reason that the markets are reacting so dramatically is because they're trading on a lack of information. We don't know how bad the mortgage crisis is. We don't know how deep it is. And until we do, I think people are going to be extremely nervous, and that's going to send stock prices up and down and sideways.

But in the end, it will all filter out, based on the real underpinnings of the market. I just don't think that they're as bad as it might appear today.

JEFFREY BROWN: All right, we'll end on the upbeat then. Thank you all very much for joining us.