TOPICS > Economy

U.S. Stocks Up, But Unease Ripples Across Global Markets

October 16, 2008 at 6:10 PM EST
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Although U.S. stocks surged in the final moments, stocks in Europe and Asia dropped Thursday as fears of a worldwide recession grow. Journalists and an economics analyst discuss.
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JIM LEHRER: Jeffrey Brown has our recession story.

JEFFREY BROWN: Even as Wall Street opened this morning, there were heavy losses in Asia — Japan’s Nikkei index fell 11 percent — and throughout Europe.

In the era of globalization, the sun never sets on the financial markets, and now the turmoil and fears of a steep recession are worldwide.

We update the situation with Zanny Minton Beddoes, economics editor for the Economist magazine; Heike Buchter, business correspondent for Die Zeit, a German newspaper; and Susumu Awanohara, a long-time economics journalist and now senior analyst at Medley Global Advisers, an investment consulting firm.

Heike Buchter, let me start with you and the situation in Europe. Are the problems there because of what’s happening in the U.S. or because of problems of their own? Or can those even be separated?

HEIKE BUCHTER, Die Zeit: I would say the problems originated here in the U.S., and that’s where — yes, in Europe — or at least in Germany, people are thinking this is where the original sin happened, so to speak, and then it came to Europe.

But one has to say that the Europeans were ill-prepared. They should have known that this is a global problem and they should have been much more on the lookout for problems in their own banking system. And they just waited far too long to deal with it.

JEFFREY BROWN: And to what extent did the banks there invest in subprime loans and other what turned out to be bad loans?

HEIKE BUCHTER: I mean, the German government just put together a rescue package almost the size of the U.S. It’s about $670 billion, 500 billion Euro.

And that shows you the extent of the government’s worry about the banking system. So nobody really knows for sure what’s in the balance sheets, but the size of the rescue package is, for German standards, it’s enormous.

International economic links

Zanny Minton Beddoes
The Economist
... we're seeing huge swings in markets outside of the U.S., because the rest of the world, we've got some of this technical stuff going on, you've got a huge risk aversion, you've got people fleeing into dollars out of riskier currencies ...

JEFFREY BROWN: Susumu Awanohara, what about in Asia, the markets there? Give us an overview of what's driving the turmoil there.

SUSUMU AWANOHARA, Medley Global Advisors: Well, it is very much following the U.S. market. You mentioned that the Asian markets were down yesterday, or I guess today, earlier today, yesterday. It's going to open again -- I wouldn't be surprised that it would rise again. It went down sharply and before that, on Tuesday, it went up.

So the volatility, I think, is going to continue. But it's very much following the U.S. market.

Just until a few months ago, the Asians were proudly saying that this time there is a decoupling, so called. The idea is that, even if the U.S. gets a cold, Asia doesn't have to come down with pneumonia again, because there's a lot of trade among Asian countries, a lot of mutual investment.

There's a big thing going there. So it won't be so much affected by a slowdown in the U.S. That theory has been blown away, and so we are looking at the U.S. And I think the stock markets in Asia follow, by and large, what happens in the New York markets.

JEFFREY BROWN: Zanny Minton Beddoes, help us untangle this sort of globalization, how this works. Do you think of it as things moving in a line from one place to another? Or is there a kind of circular blowback that affects everyone at the same time? How do you think about it?

ZANNY MINTON BEDDOES, The Economist: I think it's both of those. I think we are, as you said in your introduction, we're in a globalized world where the sun never sets on financial markets. And I try and think of it in three dimensions.

The first one is how countries are linked economically. And so the question is, to what extent -- the U.S. is recession. How much of an impact does that recession have on other economies?

And that's where people used to think that the emerging economies were decoupled. Now I think that has been blown away, and they're not.

JEFFREY BROWN: And when you say -- I mean, just to stop for a second -- we've been talking about Asia and Europe, but you're talking about emerging markets?

ZANNY MINTON BEDDOES: Emerging markets broadly. That was view that the emerging companies have been becoming an increasingly important part of the global economy. And their domestic demand, their own engines are growing faster, and so that they would...

JEFFREY BROWN: And these are countries like...

ZANNY MINTON BEDDOES: China, Brazil, the big, fast-growing, emerging economies. I think that is being increasingly tested, that thesis.

But that's not the only link that I look at. The second one is a financial link, if you will.

And that's, if people are risk-averse, if they're worried, they pull their money out of riskier investments. And many emerging economies are still seen as riskier investments.

And then the third link is what you might call the technical link, which is, if a hedge fund is losing money in the U.S. and has to raise some cash quickly, it might sell something in Brazil, it might sell something somewhere else in the world.

And that's not really an economic link between them at all. It's just a -- it's a purely technical link within financial markets.

JEFFREY BROWN: But it can have economic impact?

ZANNY MINTON BEDDOES: It can have a huge effect. And we're seeing all of those three things going on at the same time. And that's why we're seeing huge swings in markets outside of the U.S., because the rest of the world, we've got some of this technical stuff going on, you've got a huge risk aversion, you've got people fleeing into dollars out of riskier currencies, and you've also got a sense of, "Oh, my goodness, the world economy is going into recession. It's not just the rich world."

Potential impacts of a recession

Heike Buchter
Die Zeit
... in Germany, it will take a long, long time to rebuild the job market. It took a long, long time to get where we are now. And people are very afraid that they will fall back again.

JEFFREY BROWN: Let's look at the economic impact. Last night on the show, we talked about what's happening in the U.S. economy.

Heike Buchter, where do you see the economic impact already in Europe? What businesses might be getting hurt, layoffs? Are there real fears of a very steep recession already?

HEIKE BUCHTER: Very much so. On the official side, the government at least hopes, maybe Germany, the biggest economy in the E.U. still, by large, is sneaking by maybe.

And, yes, it's this decoupling theory of which has been totally abandoned by now, but that has been around for the last couple of years and people loathe to let go of that. But I guess Main Street in Germany is already afraid that this might have a huge impact in the job market.

And that's really bad for Germany, because the labor market there is much more rigid than it is in the U.S. And whatever jobs we might lose -- and people are very well-aware that, if stock markets are going down, companies will have to cut costs, and they will cut costs when they will shed jobs.

And in Germany, it will take a long, long time to rebuild the job market. It took a long, long time to get where we are now. And people are very afraid that they will fall back again.

JEFFREY BROWN: Mr. Awanohara, what about in Asia? The impact, the economic impact, are you seeing it already?

SUSUMU AWANOHARA: Very much so, also, in Asia. China, for example, is a big exporter to the U.S. We hear anecdotes of, you know, industries, whole industries in a region being affected, anecdotes, so I don't know the real statistics.

But sometimes you hear about 60 percent, 70 percent of the toy companies shutting down, maybe for other reasons, safety reasons, also, but largely also because of a recession or slower growth in the U.S.

Or you hear about containers, containers coming back empty, I mean, going to America more empty, still coming back full, because emerging markets are following the developed markets, developed countries in this cycle.

So they're still importing as much as before or nearly as much as before, whereas their exports to the developed countries are suffering.

World governments' response

Zanny Minton Beddoes
The Economist
... now you've had an interesting twist, because the U.S. this week, with the bank recapitalization plan, kind of followed Gordon Brown's lead. He had had a plan like that for the U.K. before the U.S. did.

JEFFREY BROWN: Zanny, what about government responses now? We know over the weekend there was the coordinated European response after a period where nothing much was happening.

Today, I think it was, or yesterday in London, Gordon Brown called for a new Bretton Woods, referring to the 1944 conference that helped create the post-war economic financial model that we have, the IMF, World Bank. What would that mean today?

ZANNY MINTON BEDDOES: Creating a new Bretton Woods?

JEFFREY BROWN: Yes.

ZANNY MINTON BEDDOES: Well, I think Gordon Brown has wanted to do that for a long time. He's been talking about this for years. But I think we've seen three specific stages in this.

The first was, up until about two weeks ago, governments outside of the U.S. by and large thought this was primarily a U.S. problem. And particularly in Europe, there was a lot of schadenfreude, a lot of, "This is the -- the U.S. problem, it was made in America, it's their mess."

And then, suddenly and very quickly, there was a recognition that it was not just a U.S. problem, that it was a global problem. And I think we had a real shift last weekend at the IMF meetings when there was a recognition that to solve this, it was a global problem, it needed a comprehensive solution, a systemic solution.

And I think that's what we saw. We had coordinated central bank interest rates cuts. We've had, as you said, governments across Europe now recapitalizing their banks, doing -- guaranteeing lending.

And now you've had an interesting twist, because the U.S. this week, with the bank recapitalization plan, kind of followed Gordon Brown's lead. He had had a plan like that for the U.K. before the U.S. did.

And so now the Europeans think that they're kind of intellectually in the driving seat and that they can sort of use the oomph from this to set in place broader reforms.

And I think Gordon Brown has a point in two ways. First of all, you know, we have a globalized financial market, but we have national -- by and large, we have national supervision, national regulation. It makes sense to try and develop more global norms, more global rules.

And, secondly, the machinery we have from the original Bretton Woods -- you mentioned the IMF and the World Bank -- are completely outdated for the kind of world we have. They're dominated by the Europeans and the Americans.

The growing powers, the emerging economies, who are becoming increasingly important and to whom economic heft is shifting, need to have more representation, need to be more involved in figuring out what kind of a global financial architecture, if you will -- that's the jargon -- we want to create.

And so, while I don't think Gordon Brown is going to -- we're not going to have a conference like we had in 1944, where we totally remake the world economy. That happened during a war and after a depression.

JEFFREY BROWN: In the midst of the war, yes, exactly.

Including emerging markets

Susumu Awanohara
Medley Global Advisors
I think the Europeans and the G-7 are trying to have a summit to discuss the new Bretton Woods in the near future ... major developing countries would probably be very quick to insist that they have to be a part of this new world financial order.

ZANNY MINTON BEDDOES: You know, things are bad, but they're not that bad. And so, as a result, we're not going to have such a big change.

But I think we will have lots of meetings to discuss this. And I hope, with luck, we'll get a new kind of multilateralism out of it.

SUSUMU AWANOHARA: May I come in on that?

JEFFREY BROWN: Yes, go ahead. We just have a minute, but go ahead.

SUSUMU AWANOHARA: Yes, you know, on the new Bretton Woods, I would like to say, on Asia, I think the Asians would insist on being part of the rule-making.

As it was mentioned already, they are a lot stronger, a lot more powerful and richer than they were in 1944, of course. And even now, the Group of Seven, Group of Eight, have to often invite the so-called BRICs, Brazil, India, China, Russia.

JEFFREY BROWN: The emerging markets we're talking about, yes, would have to be part of that.

SUSUMU AWANOHARA: Yes. And I think they would want to -- they would insist on coming in. I think the Europeans and the G-7 are trying to have a summit to discuss the new Bretton Woods in the near future, but I think these major developing countries would probably be very quick to insist that they have to be a part of this new world financial order.

JEFFREY BROWN: All right, Susumu Awanohara, Heike Buchter, and Zanny Minton Beddoes, thank you all very much.