Loory: We’re going to try to make some sense out of the so-called credit crunch or drop in stock markets around the world. Was it caused by the way American bankers made dangerous subprime loans to people who couldn’t afford to repay them as interest rates went up? Major banks throughout Europe and Asia apparently followed American bankers in lending money to poor credit risks. The international bankers did it by buying up bundles of American loans, and so the uncertainty has spread. The questions now are: Is this a short-term credit crunch, or is it the start of a major international market crisis? Is this the beginning of a sharp decline in the international economy that could cause job losses in countries that supply goods to the United States or in the U.S. itself? And what impact is this going to have on us whether we invest or not? Let’s start by asking how we should characterize what is going on in the European markets these days? Is this the beginning of a panic, and what is the long-term outlook?
Brian Love, European economics correspondent, Reuters, Paris: It is the beginning of a panic. We’ve just had another run on the stock markets in Europe, and there is similar trouble in Asia and in the U.S. What is intriguing is the way this problem, which has been simmering for months in the subprime mortgage market in the U.S., has turned into a sudden rude awakening in Europe and prompted the realization that this isn’t just a U.S. problem. Last week one of Europe’s biggest banks, BNP, a French bank, announced it was freezing three small investment funds which had invested in subprime funds in the U.S. That would have passed unnoticed at another time, but now people wonder what is going on and what the exposure level is. There is a lot of fear that banks are going to take losses.
Loory: What does it mean when central banks inject funds into the money market, and what impact does it have?
Eric Burroughs, chief markets correspondent, Reuters, Tokyo: Some injecting of funds is normal, but this isn’t entirely normal. We’re seeing a ripple effect that started with the U.S. subprime story and then hit money markets, which are normally boring, three- or six-months bills. As fear of the unknown spread, there was a rush to secure cash. As people rushed to secure cash, the price of money went up and central banks went above target. The central banks temporarily had to pump money into the banking system to maintain that policy rate. The central banks reacted as they had to, and things have calmed for the money markets, but what happens next is still an open question.
Loory: How serious are the problems for German banks?
Andrew Bulkeley, correspondent, The Daily Deal, Berlin: The problems in Germany aren’t as severe as elsewhere because only a minority of Germans own the places in which they live and exposure to subprime loans was limited. However two weeks ago, IKB, a German bank, said that without help it was going to go bankrupt. Then, all of Germany’s banks jumped in to cover their losses. Another problem fueling these losses is that banks are tightlipped about their exposure. Three weeks ago every German bank came out and said we’re not exposed. Then IKB went belly up, and it seems like every day another bank comes out and says it’s exposed. Investors are scared about what is coming tomorrow, and they’re selling and selling.
Loory: Is the U.S. situation just a problem for investors, or is it going to impinge on all of us?
Alex Markels, senior writer, U.S. News & World Report, Washington, D.C.: Panic feeds on itself, but actions by the Federal Reserve over time will calm everyone. By injecting money into the market, the Fed sets a target rate that it expects banks will lend each other money at. Therefore, if a bank has a run or needs extra cash, it can borrow in the market and expect that the rate is going to be near the Fed’s target. What has happened is that banks are unsure of their long-term relationships with other banks. Those relationships become murky when one bank finds out that the bank it has been borrowing $10 from or lending $10 to every day for the past 10 years may not be able to pay it back or may be invested in securities that have put that money at risk. Then banks become more risk averse and ask for a higher amount of yield to compensate for that risk.
Loory: What impact is this having in China?
Burroughs: The U.S. housing downturn has been progressing for the better part of a year now, yet the Chinese economy grew in the second quarter of this year. In Asia, there has been some resistance to the U.S. slow down. Japanese exports to the U.S. have definitely tapered off, but at the same time, they’ve been offset by exports to Europe and to China. What happens to the U.S. consumer is a big question, and now we’re seeing repercussions of the subprime loan defaults that began about a year ago and are slowly filtering through the portfolios of investors around the world. The big question is whether this becomes not just a subprime issue but actually affects the prime or the quality U.S. mortgage borrowers.
Loory: Who are the subprime borrowers?
Markels: By definition, a subprime borrower is somebody who doesn’t have a good credit history and, therefore, the bulk of some subprime borrowers are people at the low end of the economic spectrum. But there are also borrowers who have good credit but who have put themselves in such a highly leveraged position that if one thing goes wrong, they can get in a lot of trouble.
Loory: In the U.S., real estate sales are beginning to drop. What impact will that have on manufacturing economies that make materials for the U.S. housing market?
Bulkeley: In Germany, everyone is waiting to see what happens. If the housing crisis leads to a recession in which American consumers stop spending, Germany won’t make housing products. There is a deep concern that if America goes into recession, that might be it for the German economy, which just now is recovering.
Love: Also, what will happen to Europe’s housing markets is impossible to say. In France or Germany, the lending culture is rooted in how much one earns and how much one can borrow against one’s disposable income, so in those countries there won’t be this subprime-style fall out. But in countries like Ireland, Britain and Spain, mortgages are dependent on variable rates, and there is a much more speculative market. Some housing specialists say that what happens in the American housing market will come inevitably to Europe. The question is basically the U.S. consumer.
Loory: The uncertainties that we discussed today are certainly understandable, at least to economists, and that could be a dangerous indicator for all of us.
Producers of Global Journalist are Missouri School of Journalism graduate students John Amick, Devin Benton and Catherine Wolf.