Why Has There Been So Much Turmoil In Financial Markets Lately?

Transcript

LINDA WERTHEIMER, HOST:

It's been a wild week on Wall Street. At one point, the Dow Jones Industrial Average was down 460 points before recovering. To figure out why there's so much turmoil in the financial markets, we turn, as we often do, to David Wessel. He's director of the Hutchins Center at the Brookings Institution. He's a contributing correspondent to The Wall Street Journal. David, welcome.

DAVID WESSEL, BYLINE: Thank you.

WERTHEIMER: Could you tell us briefly what happened in the markets this week?

WESSEL: Well, it's been a very bumpy week, as you said, with lots of volatility. The bottom line, when the markets closed on Thursday, the Dow Jones Industrial had been down for six days straight, lost nearly 900 points or 5 percent. And the NASDAQ Index, which is smaller companies, and the S&P 500, which is a bigger group of companies, they were down about 6 percent for the month. Now, Europe was even worse. Through Thursday, German stocks were down over 9 percent, French stocks down 11 percent. In trading Friday morning, they bounced back some. At the same time, in the bond market there have been these huge moves, both in the U.S. and Europe. Basically, investors are settling for much lower rates on bonds of safe countries, like the U.S. and Germany, and demanding much, much higher rates for fragile economies like Greece. I mean, all in all, there seems to have been a significant mood swing in the markets this week.

WERTHEIMER: A mood swing. How come?

WESSEL: Well, it's always hard to know exactly why markets change direction. Everybody has their own theory. And it's hard to know how much of what we saw this week will prove to be a temporary disruption or something more lasting. After all, moods do change abruptly and sometimes, without really good reason. But perhaps markets were a bit overoptimistic about the state of the world economy. I mean, the economy was bumping along and the markets were soaring. And investors now have come to their senses. It's hard for me to find a huge piece of bad news that turned everybody so sour. But there is a long list of worrisome developments or what the pros in the markets call downside risks.

WERTHEIMER: So which of these downside risks do you think are playing the biggest role in the recent market upsets?

WESSEL: Well, it seems to be a lot centered in Europe. Europe isn't doing well. The politics of the Eurozone, the countries that share a currency, are interfering with moving ahead with fiscal and monetary policies or structural reforms that might change the outlook. Over the past week, the divisions between Germany on one hand and France and Italy on the other have been very much evident. So basically, there's a return to skepticism about Europe and the markets. And a new whiff of deflation, or falling prices there, which is a threat, may be a possibility that Europe could export deflation to the rest of the world. I mean, after all, commodity prices are falling. And that's hurting emerging markets that depend on them. At the same time, the pace of growth in Brazil and China's slowing. And there are constant worries that China's on the edge of some big, financial crisis that it can probably handle but which might have ripple effects on the rest of us. And if that's not bad enough, there's Russian and the Ukraine, the Middle East and now Ebola, which could have negative economic consequences on the whole world economy if it spreads. I mean, I think if I had to sum it up, I'd say that there's a new focus on the dimensions of the economic, geopolitical health issues of the moment and much more skepticism about the capacity of political systems to address them.

WERTHEIMER: David, that's some kind of list of doom and gloom.

WESSEL: (Laughter).

WERTHEIMER: But you didn't say much about what - the U.S. economy. And how is it?

WESSEL: Well, that's a good question. So basically, the U.S. is doing better than a lot of other economies. The incoming data has been mixed. Retail sales were lousy, but fewer people are applying for new unemployment benefits than at any time in the past 14 years, a sign that the job market's slowly improving. The Fed expects the U.S. to be healthy enough to raise interest rates. Oil prices are down. But as Alan Greenspan once said in a different context about 15 years ago, it's just not credible that the U.S. can remain an oasis of prosperity in a world that's experiencing greatly increased stress.

WERTHEIMER: Thank you, David.

WESSEL: You're welcome.

WERTHEIMER: David Wessel is with the Brookings Institution. He's also a contributing correspondent to The Wall Street Journal. Transcript provided by NPR, Copyright NPR.