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Global Recession Fears Send Markets Tumbling

October 22, 2008 at 6:10 PM EST
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Stock markets fell Wednesday on news of weak corporate earnings and continued fears of a global recession. Economic analysts and reporters discuss the market's fall and the worldwide impact of the financial crisis.
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JEFFREY BROWN: Another brutal day on Wall Street and on global markets. At the same time, we learned that more countries are seeking or considering seeking direct help from the International Monetary Fund.

For a look at these latest developments, we turn to Catherine Mann, professor of international economics and finance at Brandeis International Business School, and Roben Farzad, a senior writer for BusinessWeek magazine.

Well, Roben, another 500-point drop. What happened today? What are people pointing to?

ROBEN FARZAD, Editor, BusinessWeek: What didn’t happen? I mean, you have emerging economies teetering, a corruption scandal out of the IMF. You have continued weakness in the United States, toxic assets, hedge fund selling. The only thing we haven’t seen so far is an asteroid or a Godzilla.

So nobody knows how to take all these things happening in tandem. And so you sell first and ask questions later.

JEFFREY BROWN: All right, I’m not going to ask you about Godzilla. Let’s go to the domestic market first. The corporate earnings were so bad, I guess. That’s what people were pointing to. What kind of companies are involved?

ROBEN FARZAD: Well, you have it hitting really everybody, not just the blue chips of the world. But obviously the weaker companies, the financials took their lumps for the past 10 months. It’s not getting better there.

You’re having hedge fund clients pull their money. Commodities producers are getting hit all of a sudden. You talk about oil being down 50 percent, so ExxonMobil takes it on the chin. You have weak earnings across the board, no sort of appetite for mergers and acquisitions.

Corporate managers really being tight on the purse strings, because they don’t know which other shoe is going to drop, so it’s a continued retrenchment across the board.

And everything is being sold off, not just real estate anymore, but emerging markets, commodities, you name it. This is a global deleveraging across the board.

Connection to U.S. market integral

Catherine Mann
Brandeis International Business School
This notion that there's a de-linking of economic activity from the United States, that's not true. There's a realization of that now. And so all of the markets are saying there is no support for growth anywhere in the world.

JEFFREY BROWN: Now, Catherine Mann, the notion that this is a global recession is pretty well established by now. We've talked about it a lot here on the show. But I gather that the growing realization is just, how deep and how many countries are involved, even countries like China at this point?

CATHERINE MANN, Brandeis University: Well, I think that there were a number of countries who believed that they could survive even a slowdown in U.S. economic activity.

This notion of the de-linking of economic growth in Asia in particular and economic growth in the United States, I never believed that, and I think it's very clear that it's not true.

JEFFREY BROWN: Explain that. Explain that, I'm sorry, the -- that's the idea that they're not so attached to the U.S. economy?

CATHERINE MANN: Right. A number of countries believed that they could continue to grow and basically shrug off the fact that the U.S. maybe was contracting a little bit or growing more slowly and that they could shrug off some of these financial market gyrations because they were a little bit more closed in terms of financial flows.

Well, clearly, that is not true. And I think one of the biggest pieces of data that has come in quite recently is the fact that China, which everyone thought, well, if anybody can be protected from the United States growing more slowly, it's China, that, in fact, China is going to grow more slowly. It's projected to grow more slowly, less than double-digits growth, which for them is a big deal.

And so this notion that there's a de-linking of economic activity from the United States, that's not true. There's a realization of that now. And so all of the markets are saying there is no support for growth anywhere in the world.

IMF gains new relevance

Roben Farzad
Businessweek Magazine
In the past five years, we've had such an emerging markets and developing economies boom that you really -- you haven't heard much out of the IMF other than these isolated little scandals.

JEFFREY BROWN: And, Professor Mann, you look at this list of countries that is in talks with the IMF, Iceland, Ukraine, Pakistan, Hungary, it's a pretty diverse list. Is there some common factor here?

CATHERINE MANN: Well, there -- I mean, one common factor, of course, and what gets you to the IMF is that you have a balance-of-payments problem that you need to borrow money in order to finance your imports. All of these countries are ones that have had capital flowing out of the country.

But why the capital is flowing out and how the IMF programs would assist them differs by the countries. Iceland is a very well-developed financial market. They got a little bit ahead of themselves, in terms of too much capital coming into the country and now, of course, it's sloshing out. That always causes problems.

Pakistan is a little bit more of a traditional kind of case, where running a deficit, needing to borrow in international markets, nobody wants to lend. I mean, the whole private financial markets really are seized up, as we all know. So that leaves the IMF with more business to do.

JEFFREY BROWN: And, Roben, of course, the IMF even a few weeks ago was considered a kind of bystander to all this.

ROBEN FARZAD: Yes, I mean, the IMF, when you hear those three letters, you think about the role in emerging market crises of the mid- and late '90s, you think about Mexico, Malaysia, Latin America.

You know, in the past five years, we've had such an emerging markets and developing economies boom that you really -- you haven't heard much out of the IMF other than these isolated little scandals.

For that specter to be invoked now and thought about and layered on to all the other blowups we're having across the globe, from commodity prices going this way and that way, from currency dislocations, you throw in a political aspect in Pakistan, we talk about regime change here in the United States, we don't know if there's going to be a supermajority of one party on the Hill, we don't know who's going to be in power in several days, there are so many moving parts, I've never seen it look this complicated.

And when that happens, you just can't hang your hat on anything, so you sell.

Nations in distress look to IMF

Catherine Mann
Brandeis International Business School
They do play a very important role in bringing capital back into emerging markets and other countries that are in distress in the financial markets, and they do play a stabilizing role.

JEFFREY BROWN: You mentioned in passing this scandal at the IMF. This is the personal affair of the chief, Dominique Strauss-Kahn. There are some headlines even today questioning whether that has an impact on the IMF's ability to do its work. Any thoughts on that or reporting on that?

ROBEN FARZAD: Jeffrey, I don't think that was really on anybody's radar today. The IMF is one of these standby bodies that, regardless of somebody's personal foibles or personal turmoil, is going to step in and fill in the void.

The thing is, we worry about institutions globally, the fact that globally central banks have had to act in tandem, that the Treasury Department here is effectively been inventing powers overnight. You look at Ireland. You look at Iceland and people effectively dancing on the border of nationalization of institutions or nationalizing things outright, and now Argentina.

So the IMF, this little tempest is the least of our concerns. We're worried about more systemic issues and if our institutions are strong enough to address them all in tandem. Never before have we been tested by all of these different exams.

JEFFREY BROWN: And, Professor Mann, do you have an answer to that? Are the institutions strong enough to address them in tandem, especially when you look at the list of countries and including all these emerging markets?

CATHERINE MANN: Well, I think, when we think about what the IMF is doing right now, I mean, the IMF practically was out of business with the private financial markets being the major source of funds for all countries over the last eight years or so.

The IMF basically didn't have anything to do anymore, so, you know, they were firing economists. They were all out on the market.

So the IMF now has business to do. It is its traditional business. I think the fact that they have come back onto the scene is a good thing, because they do play a very important role in bringing capital back into emerging markets and other countries that are in distress in the financial markets, and they do play a stabilizing role.

I think that's why you don't see anybody focusing on Dominique Strauss-Kahn's girlfriend, is because, at this point in time, it's really essential that the institutions, whether it be central banks, international institutions with broad basis of membership, that it's important right now for those institutions to work together in a cooperative way to come up with strategies that, first, provide some confidence to the market that we are moving in the same direction with the same set of goals, which is to stabilize the financial markets, and we don't want to be working at cross-purposes or be fighting over what the agenda is.

JEFFREY BROWN: All right, Catherine Mann, Roben Farzad, thanks for bringing us up to date today.

ROBEN FARZAD: Thanks for having me.

CATHERINE MANN: Thanks a lot.