On Monday, January 21, the world markets looked like they were spiraling out of control. While the market was closed in the U.S. because of Martin Luther King Jr. Day, Japan’s market fell 4 percent, China’s fell 5 percent, Germany’s fell 7 percent and India’s fell 7.4 percent—in large part because of the continued U.S. credit crisis brought on by the home mortgage collapse. The Federal Reserve reacted by dramatically cutting interest rates 0.75 percent, and it’s expected to make another cut of up to 0.5 percent this week.
 “Just a kind of one-time, ‘here’s $300, here’s $600’ is not going to have a significant impact on the economy,” says commerce prof Robert Webb on the proposed stimulus package. “It might be good for votes.” |
C-VILLE turned to our backyard to find some insight. We spoke to Commerce School Professor Robert Webb, who specializes in the study of speculative markets, after the dust settled on last week’s trading. And while the Dow Jones Industrial Average ended just a touch up over the week, largely thanks to the rate cut, Webb points out that last year, the European Central Bank and the Fed made rate cuts that analysts thought would be a shorter involvement than it has turned out to be. Here’s more of what he had to say.
C-VILLE: What is your interpretation of what happened to the markets early in the week?
Webb: I don’t want to oversimplify things and say there was only a single trading catalyst—you had a variety of factors, some market-specific, some not. One that was a massive concern was how big was this credit crisis going to become in terms of how many more wipe downs we were going to see in the banking sector, in large part because certain insurers of various types of debt instruments were facing massive losses, notably Ambac [Financial Group] and MBIA.
The other development this week is that we had this massive rogue trading scandal at Société Générale, the second-biggest French banking company, and the initial concerns as to whether or not some of the losses that we saw earlier in the week in Europe were sparked by covering actions by SoGen. SoGen denied that, so it’s impossible to tell.
Media reporting worldwide seems to have interpreted this as, “The U.S. economy sneezes, and the world catches a cold.” Is that a fair metaphor?
To some extent it is, but keep in mind that last fall people were equally as adamant that perhaps we were going to see decoupling occur, where the emerging markets in Asia and elsewhere were somehow going to be independent of the U.S. I think the decoupling hypothesis has proven to be wrong. In terms of the severity of the downturn and its impact on other countries, well, we’ll find out over time.
How much will the stimulus package that’s likely to come out of Congress help?
It seems like the short-term impact was positive. In terms of impact on the economy, those types of stimulus packages are unlikely to have a significant impact. The problem is simply that in order to be effective, you want to change incentives. And a package where you just have a tax rebate or something like that is not going to have an impact on the incentives to work, save, produce. A tax rate cut would have an impact. But just a kind of one-time, “here’s $300, here’s $600” is not going to have a significant impact on the economy. It might be good for votes.
What’s the bottom line for the small potatoes investor?
I think it’s a good reminder that both equity markets and housing markets go up and down. We’ve lived in an environment where people were given the mistaken impression oftentimes that housing was a one-way market, it only went up. Housing is a consumption item as well as an investment item in many cases, so you shouldn’t expect your house to be your only investment, per se, for retirement.