Stuart Loory: Stock markets almost everywhere (last week were) in a virtual free-fall. The stock market has declined 57 percent in Russia since last May. Lloyds bought out the major savings bank in England. Chinese were lining up to cash in insurance policies sold by AIG's Asian subsidiary. AIG, started in Shanghai in 1921, foundered in the United States. The United States as the global beacon of unfettered free-market capitalism was in question. How serious is this crisis, is it a psychological lack of confidence, or are there serious long-lasting financial problems?
Philip Coggan, capital markets editor, The Economist, London, England: It is extremely serious. The U.S. started the year with five independent U.S. investment banks, now there are two. Money was easy to get for a long time. People felt wealthy by borrowing to buy assets. The whole process is unwinding now as assets are sold to pay off the debt, this forces prices down, which gets more people into trouble. It is like a negative dot-com boom, spiraling downward as fast as they spiraled upward in 1999.
Loory: The Western European markets have recovered somewhat, are they still in trouble?
Robert Leicht, political correspondent, Die Zeit, Hamburg, Germany: If I knew I would be very rich. The difference is this continent doesn't have an overly indebted credit economy. German house prices today are still rising and not falling; private debt is low. The international turbulence may hit but hopefully no catastrophe.
Loory: What about Russia, the market collapse started there long before it was experienced in the U.S.?
Andrew Kramer, business and economics correspondent, New York Times, Moscow, Russia: The problem was overconfidence in oil. There was willingness to not look at the fact that historically these commodities have always had boom-and-bust cycles. The past few years have been quite a party in Moscow. About May, realization hit that global growth was slowing, and as a result oil prices would likely slow.
Loory: You have written that there is considered to be a crisis in business governance as well?
Kramer: Yes, it is hard to tell how much is a self-created problem. The issues locally are government involvement in companies and weak property rights. Companies are not likely to pay dividends if the government owns them, no matter how high the earnings are at a company like Gazprom.
Loory: The markets in Asia have gone down. Does this reflect a serious crisis in confidence in what is going on in the U.S.?
Eddie Leung, editor, Asia Times, Hong Kong, China: The economy of Hong Kong was robust at the beginning of the year, but right now we are uncertain about the future. As long as the Chinese economy is OK, other parts of Asia's economy, such as Hong Kong, will not be affected too much.
Loory: What is the situation in the U.S.? Is it like a reverse dot-com boom?
Gus Faucher director of macroeconomics, Moodyseconomy.com, West Chester, PA: The housing market is the underlying problem, and then all the associated losses. There is a transparency issue also. The markets will remain on edge until we know where all the losses are and who is holding them. AIG was found to be holding a bunch and couldn't make them up, that is why the federal government took them over.
Loory: Is it a transparency issue with the way the news business is covering this story?
Faucher: No, it's the financial institutions themselves. There are all sorts of complications involved. Some of these businesses, themselves, are trying to figure out what they are holding exactly. Banks are reluctant to deal with one another, which is causing the financial system to freeze somewhat.
Loory: What about the U.S. role as a financial markets leader in the world?
Coggan: The IMF or World Bank will be laughed at the next time they go to a developing country and say they must have free markets. The problem is the executives and traders get all the profits and the taxpayer ends up with all the losses. Banks cause more pain in the economy on the way down than any other sector. If a big auto company gets into serious danger, it is going to be hard for politicians to resist bailing them out.
Loory: Countries like China, Russia and others hold so many (billions of dollars worth of American) bonds. How much will that have an impact?
Coggan: The U.S. was keen to keep the bonds of Fannie Mae and Freddie Mac fully paid up because other governments own them. If the U.S is counting on the kindness of strangers to buy its debt, they can't afford to offend their creditors.
Kramer: Sanctions against Russia, as was discussed regarding Georgia, are not possible. Partly because the Russian Central Bank held about $100 billion in Fannie Mae and Freddie Mac bonds. In other words, they owned American homes through the securities. Since earlier this year they have sold off about $70 billion worth of U.S. mortgage-backed securities.
Loory: Has there been any serious impact on the Chinese economy because of this?
Leung: The Chinese economy will stay strong if the export business, especially to America, stays OK. The Chinese government wants to assist in the present U.S. financial crisis.
Loory: What does the financial crisis mean to people who do not invest in financial markets?
Faucher: A lot of people in the U.S. are invested in other ways, through mutual funds, index funds, 401K or IRA. These people will see a lot of their wealth disappear. Banks are unwilling to lend without pristine credit. There will be ripple effects throughout the economy.
Loory: Will that be the same in the U.K. and elsewhere in the world?
Coggan: Yes, in the U.K., housing prices are falling and mortgage applications are the lowest for a long time. Germany didn't have the housing boom like the U.S. and the U.K. but Spain and Ireland have had real busts.
Loory: Why is Germany different?
Leict: Germans have been averse to buying bonds and shares. If the German export boom becomes restrained by the American credit crunch, it would be felt in the real economy. This might be the first time a European common currency and a common European Central Bank make a difference.
Loory: The dollar used to be the preferred currency in Russia. Now it has been replaced by the Euro; a lot of places in Russia no longer accept dollars. Is that correct?
Kramer: Yes, the dollar had been declining around the world for about three years now. At the same time, the ruble was strengthening, a lot of Russians are simply switched their savings into rubles or chose euros. After more than a decade of collapse and significant problems with the ruble, recently people are actually comfortable using their own currency.
Loory: Are we going to continue to fall into the hole or instead see light at the bottom?
Coggan: The problem is that the financial problems can cause larger problems in the economy because banks simply stop lending; those economic problems then hit banks all over again. Coordinated action by governments around the world is needed to ease the problems in the lending market; banks are literally frozen. Action to cut interest rates to help people out may be seen.
Producers of Global Journalist are MU journalism graduate students Jared Gassen, Chris Hamby, Sananda Sahoo, and Hui Wang. The transcriber is Pat Kelley.