The U.S. and Europe: Dragging each other down

Marketplace Staff Aug 19, 2011

The U.S. and Europe: Dragging each other down

Marketplace Staff Aug 19, 2011

Steve Chiotakis: Markets around the world are
acting a bit like a dog chasing its tail. Wall Street was down big time yesterday after European shares had tanked. And today European shares are tanking because Wall Street was down in the dumps yesterday. Now one sector that’s at the heart of all the selling going on is the banking business. Fears of a financial crisis a la 2008 abound. Let’s continue coverage now of “Breakdown: Our Economy. One Step At A Time.”

We have Marketplace’s Stephen Beard is live with us at our European desk in London. And Marketplace senior
business correspondent Bob Moon is with us live here in Los Angeles.

Stephen, first to you — banking fears sent stocks down last week, and Europe then banned short-selling. So that didn’t work apparently, huh?

Stephen Beard: No, the ban on short-selling — that’s specutlators selling stocks they don’t own and then buying it back when the price is much lower — that ban seems to have been irrelevant in this market. Bank shares have fallen across the board. Big French banks that are covered by the ban have fallen sharply. Societe Generale, that’s been the subject of a lot of rumor recently, fell by 12 percent yesterday. Clearly, the ban hasn’t stopped the route. Two things are happening: the investors who are actually holding the bank stock are getting out, they’re selling them. And people who make the market in these shares are marking the shares down in order to temmpt in buyers. They’re not succeeding — investors are very nervous about holding bank shares.

Chiotakis: And where is all this fear coming from, Stephen?

Beard: It is in a sense fear itself. But one trigger was a story that a big European bank had to go to the European Central Bank for emergency yesterday, worht some half a billion dollars. We don’t know which bank. And that’s increased the uncertainty and the fear with everyone wondering, is there a big bank in trouble? Which one is it?

Chiotakis: Alright, now to senior business correspondent Bob Moon in the studio with me now. Bob, is the same fear going on here in the U.S. with the stock market nosedive yesterday? I mean, this sounds a lot like three years ago.

Bob Moon: You know, there’s an old song called, “You’ve Got Your Troubles, I’ve Got Mine,” and that was just running through my mind as I was hearing Stephen talk about this contagion thread from Europe. And don’t get me wrong — there’s no question that was a big part of the crisis of confidence flare up yesterday. But U.S. banking stocks took some of their worst hits as news broke about our own troubles over here. The drops coinciding with reports of turns for the worst in unemployment, home sales, factory activity. In fact, we saw one of the biggest tumbles just as the Fed in Philadelphia reported a sharp drop in manufacturing. That set off a chorus of screams from Wall Street that it’s really looking like the U.S. is sliding over the edge into a new recession, and then, it didn’t take investors long to connect the dots and decide its tough for banks to make money in an economic downturn.

Chiotakis: Let’s talk about the banks, because I thought that we’d been hearing that U.S. banks had been doing better, Bob?

Moon: And, for the most part, they are better funded with more in their vaults than they were three years ago. But all those bad loans they made are still on their books, and they’re still making it tough to be profitable. Just yesterday — just today, we’ve got reports that Bank of America is planning a wave of layoffs — maybe 10,000 workers to get back to profitability. Now comes this threat of recessionary headwinds, and its all a vicious cycle: if business is bad here, that doesn’t bode well for all the interconnected banks in trouble across the Atlantic, and that sets off a whole new round of worries.

Beard: And, on this side of the Atlantic, Steve, there’s the additional crisis over Eurozone debt. All these big European banks are stuffed full of Eurozone government bonds. If one or more of these governments defaults, that could set off a chain reaction of bank loses, perhaps even bank failures, which could ricochet around Europe, and, I’m sorry to say, head off back across the Atlantic to the U.S.

Chiotakis: More dog-chasing-tail. Alright, Marketplace’s Stephen Beard in London — Stephen, thank you.

Beard: OK, Steve.

Chiotakis: And, Marketplace’s Bob Moon in L.A. Thank you, Bob.

Moon: Thanks.

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