Banking crisis 2.0: Replace Lehman Brothers with Greece or Spain

Jill Schlesinger

STEVE CHIOTAKIS: To help us make sense of all the volatility in the markets, Jill Schlesinger is editor-at-large at CBS/MoneyWatch. She is also a former options trader with Comex, the Commodities Exchange in New York. And she's with us --as she always is on this Friday morning. Good morning Jill.

JILL SCHLESINGER: Good morning.

CHIOTAKIS: We hear all the time that the stock market isn't the economy and the economy isn't the stock market. So what exactly does the market represent for the average Joe or Jane?

SCHLESINGER: Well, over the long term the stock market represents the ability of companies to generate earnings for their shareholders. But look, in the short term, the market is the repository for investor emotions about world events, the economy, and of course their own fear and greed. And boy we're seeing that play out this week.

CHIOTAKIS: Emotions -- an emotional repository?

SCHLESINGER: Yes, indeed.

CHIOTAKIS: Is this really -- what we're seeing, these wild swings in the market up and down, up and down -- some calamitous event or some new banking crisis? I mean, how does it compare to 2008?

SCHLESINGER: Well, it's a historic event, I don't know if it's calamitous, we're only down 2.2 percent on the week so far -- that seems crazy. But never in the history of the S&P index, and that goes all the way back to 1928, never has there been alternating gains and losses of more than 4 percent on four consecutive days. It's amazing.

CHIOTAKIS: This is the S&P 500, right?

SCHLESINGER: Yeah, and that goes back pretty long time and that's including the Depression. Now the comparison to 2008 may be apt, but the U.S. financial system isn't the star of this crisis. The European nations are. You could easily place Bear Stearns and Lehman Brothers with say Greece and Italy and Spain. In today's example, the European nations are likely going to bail out these nations. In 2008, U.S. taxpayers bailed out the U.S. banks to steady the system. Now, I just want to bring up one big difference from the two scenarios. It's something that we call -- get this, it's something you can use at a cocktail party tonight -- recency bias, now that's the tendency to remember more recent events or observations quite vividly. You give that information tons of weight because you've got that information. In other words, we are freaking out so much today, because of what we just lived through in 2008.

CHIOTAKIS: Wow. And all the swings in the market, Jill. And a lot of trading going on. Someone's making a whole lot of money, right? I mean, who is it?

SCHLESINGER: Yeah, this is when I go back and say gosh if I was just a day trader again. Those active traders are the ones that make money in big volatile periods. Now, managers and their computer driven trading models, they are accounting for 70 percent of daily market volume. They generate lots of volatility, and they hold their positions for minutes. By the way, these guys zero out their holdings at the end of the day. They go to cash overnight -- that's why we have massive moves right in the last hour of trading.

CHIOTAKIS: Jill Schlesinger from CBS/MoneyWatch. Jill, have a great weekend.

SCHLESINGER: You, too.

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