JEFFREY BROWN: Another huge hit on global markets, another volatile day on Wall Street, more nations looking for help, and new steps taken by the U.S. Treasury.
We catch up on all this at week’s end now with Simon Johnson, former chief economist at the International Monetary Fund, he’s now a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics.
Jim Ellis, assistant managing editor of BusinessWeek magazine.
And Binyamin Appelbaum, a financial reporter at the Washington Post who covers the Treasury Department.
Well, Simon Johnson, the story overseas just gets worse. What jumps out at you today?
SIMON JOHNSON, MIT Sloan School of Management: Well, today, I think it’s three things. Increasing pressure on Eurozone countries, so rich industrialized countries, Greece, Ireland, even Italy under question, according to the market.
Oil prices continue to fall, despite OPEC’s actions.
And, of course, currencies have moved in a very big way. The dollar is appreciating, which has some good sides, but also some really difficult sides.
JEFFREY BROWN: Well, explain that to us. The dollar — this is after years of the dollar dropping. It suddenly — and this has been creeping up over the last few days — is quite strong. Now, why? What does that tell us?
SIMON JOHNSON: Well, it tells us that things are becoming even more turbulent. The dollar has been declining, roughly speaking, since 2002. All of a sudden, people are seeing it as the ultimate, perhaps the only safe haven, partly because the Eurozone, the European countries that share the euro, looks increasingly shaky.
So there’s a flight into dollars. And that is really potentially destabilizing the situation further.
JEFFREY BROWN: Wait a minute. But it’s a good sign in the sense that it shows confidence in the U.S. markets, but destabilizing for other countries.
SIMON JOHNSON: It shows confidence in the U.S. government. They’re coming into U.S. treasuries. It doesn’t prevent the U.S. stock market from falling, obviously.
And it absolutely shows a lack of confidence elsewhere in the world. No one believes in anything right now apart from U.S. treasuries. That’s a big change; that’s a big problem for everyone else in the world.
JEFFREY BROWN: And particularly for emerging markets.
SIMON JOHNSON: Emerging markets have a lot of debt denominated in dollars, particularly the private sectors. They borrow to do productive things with it, but they owe money in dollars.
Now their currencies are depreciating against the dollar, it gets harder and harder to pay that back. Their governments have reserves — quite a lot of reserves — but nowhere near enough to deal with the current situation.
Drop in oil prices
JEFFREY BROWN: Jim Ellis, Simon Johnson, one of the things he mentioned was this dramatic drop in oil prices. Now, how do we explain that?
Today, OPEC tried to drop the production to drive the price back up; that didn't seem to have any effect. How do you explain what's going on there? How should we think about it?
JIM ELLIS, BusinessWeek Magazine: I think that investors are saying that, you know, we're in store for a very, very bad worldwide recession. And what that means is that even if, you know, OPEC tries to restrict the amount of oil that's out there, there's not going to be enough demand to really, you know, sort of force the prices to stay up.
I think that that sort of shocked a lot of investors today. And that was one of the reasons that the markets, you know, reacted so badly to what was going on. They thought, OK, worldwide recession.
They also said that, even places that hadn't seen recession in quite a long time, like Great Britain, you know, was on the verge of recession, which it hasn't seen since 1990, '91.
I mean, things are bad out there. And they've gotten a lot farther away from a housing-led sort of downturn in the U.S. into a full-scale global meltdown.
JEFFREY BROWN: So it's a bad sign. But on the other hand, at least, in the short term, doesn't the drop in prices help U.S. consumers?
JIM ELLIS: It can help U.S. consumers in a way. The problem is that there are much greater stresses on U.S. consumers, the biggest one being employment.
I mean, we spent a lot of time worrying about sort of shoring up the banking system and we sort of forgot that, even before the credit markets began to seize up in September, that employment, you know, was becoming a bigger problem.
Unemployment was rising. Job losses throughout the U.S. had come up to about 750,000. And we haven't seen the worst of that yet.
We are basically looking at consumers pulling back their spending, which is a good thing in the long term, because it means we'll have more savings. The big problem now is that, if they don't spend, that means the companies don't get enough revenue coming in.
They'll have to cut back on the number of people they hire. And that means that more people will be out of work, more people won't be spending, more companies then will have to cut back. And you get into this sort of downward spiral.
More banks receiving federal funds
JEFFREY BROWN: Now, Binyamin Appelbaum, in the meantime, the reports today of the U.S. Treasury taking some new steps to inject funds into at least another 20 banks and, reportedly, insurance companies.
Now, what can you tell us? Start with the banks. What you can tell us so far?
BINYAMIN APPELBAUM, Washington Post: Well, the Treasury actually backed off its plans to announce the names of those 20 banks. We understand that it's concerned that, if it announces 20 names, people will start speculating about names that aren't on the list and investors may drive down their shares.
So the Treasury is just going to let those names trickle out. One of the ones we already know is PNC Bank, which got about $7 billion from the government to buy a weaker bank, National City of Cleveland, which was actually denied funding by the government.
So the government's now picking winners and losers in the banking industry, hoping to merge weaker companies with stronger ones, and starting to figure out which companies may survive this.
JEFFREY BROWN: And you're saying they have to be careful about announcing the names, because that suggests possible winners and losers or status of banks?
BINYAMIN APPELBAUM: Yes, the government has put itself in the position of sort of giving a seal of good health to banks. If it invests in them, it means that the government believes they're going to survive. Conversely, if it refuses to invest in a bank, investors may take that as a bad sign about the bank's health.
JEFFREY BROWN: And what about this notion of expanding the program to insurance companies?
BINYAMIN APPELBAUM: This is really big. This is our really first indication that the problems in the insurance industry are bad enough that the government is going to attempt something similar to what it's already said it will do in the banking industry.
It's going to buy stakes in a large number of insurance companies as a means of shoring up the health of that industry. It's as if we've learned all of a sudden that the problems we already knew existed in the banking industry are apparently bad enough in the insurance industry that the government needs to take action.
JEFFREY BROWN: Simon Johnson, what do you make of that? I mean, we knew that, in a sense, right?
SIMON JOHNSON: Yes, we did.
JEFFREY BROWN: So that's not news, but it is news that we're now taking some action on insurers?
SIMON JOHNSON: I think it's very good. It shows that Treasury is being flexible and Treasury is updating.
The market has been probably pricing in quite a high probability of default for insurance companies for at least two weeks, which in this market is an eternity. I think the Treasury is moving to address that.
And I suspect that, as other cracks appear in the financial system, they'll be more and more willing to recapitalize as appropriate.
Uncertainty plummets asset value
JEFFREY BROWN: Jim Ellis, you know, we keep -- it's like we're adjusting our expectations every day. I read a -- this morning, when the market started off so badly, I saw someone at an investment house saying that, if it's only a 3 percent drop today in the U.S. markets, the quote was, we will have had a very good day. So...
JIM ELLIS: It's amazing.
JEFFREY BROWN: ... and it ended up 3.6 percent. So what do we make of this?
JIM ELLIS: Well, basically, the market is re-pricing risk. It's re-pricing what values really are.
One of the things that was a great thing during the run-up is that people started to extrapolate, you know, past performance sort of far out into the future. That bid up all sorts of prices of assets, whether they were stocks, whether they were houses, whether they were whatever, and we all benefited from that.
Unfortunately, now we're seeing the mirror image of that, as people suddenly say, "We're not going to have that kind of growth in households, in household wealth and, therefore, households will have less to spend."
All of a sudden, they're dialing everything back and they're trying to figure out, what is the value? It turns out that there's no intrinsic value here. The value is what somebody is willing to pay today and, if they're spooked, they're willing to pay even less.
So, therefore, you know, if we can get some of this volatility out of the market and not have these 5 percent moves, 6 percent moves, we'll think a 3 percent move down isn't such a bad thing.
JEFFREY BROWN: Now, Binyamin Appelbaum, the other talk in Washington the past couple of days was about trying to come up with some kind of program to help stem the tide of foreclosures in the mortgage market. What can you tell us about that and how close we are to some kind of new announcement?
BINYAMIN APPELBAUM: We're getting closer. The Federal Deposit Insurance Corp. and the Treasury are talking about a program that would basically help banks to modify loans by guaranteeing modified loans against defaults. The government would promise to pay back the bank if the borrower didn't.
In exchange, the bank would have to reduce the amount that the borrower owed or reduce the interest rate, basically help the borrower in some way. It's an attempt that a lot of people would like to see to help borrowers.
We've seen a number of large programs to help the industry. And there's increasing concern both about getting at the root of the problems and at helping homeowners directly.
JEFFREY BROWN: But there was resistance to such a thing for quite -- for a while here. So you think there's a consensus building now that something needs to be done?
BINYAMIN APPELBAUM: I think there is. I think we will see some form of program coming out of Treasury.
We've already seen several efforts to address this in various ways through the Federal Housing Administration, through industry cooperative efforts. But the government seems to think that it's now time to go ahead and take another step on this.
Some hope lies in foreign banks
JEFFREY BROWN: And maybe we can finish back on the international scene, Simon, in the "what next" category. You have the IMF preparing a big package, it sounds like, for a lot of these -- a lot of countries.
SIMON JOHNSON: Well, the IMF is stepping up with ready money for four or five or six countries in the very near term. They're also preparing some sort of enlarged facility or easier access to money, probably for a broader set of emerging markets.
We don't yet know the details. And we don't know exactly how much money is on the table. If it's in the $10 billion to $20 billion dollar range, I think it's going to be like OPEC production cuts. The market's not going to notice.
If it's $100 billion to $200 billion, if they can bring the Japanese on board -- the Japanese have a trillion dollars in reserves, the Chinese have $2 trillion in reserves -- if they could make something with these big, deep-pocketed investors on board and other rich countries, too, then that could really make a difference and turn the tide.
So wait and see. We should know early next week the details.
JEFFREY BROWN: And do we look for any possible further action from the G-7, the richest nations, on, for example, the currency issue or any step they could take?
SIMON JOHNSON: Well, the G-7 has exactly had a responsibility in the past for currency, currency intervention when the markets become disorderly.
Early this morning, it seemed like we might have been on the verge of that. It could be back as early as Monday or Tuesday of next week.
I think this week, the G-7 was putting its heads together and deciding under exactly what circumstances they want to come in and show people that the dollar is not a one-way bet. It can go up; it can go down. It's very important that the market understand that again.
JEFFREY BROWN: All right, Simon Johnson, Jim Ellis, Binyamin Appelbaum, thank you all very much.