Submerging Markets : Planet Money In today's Planet Money podcast, we take a look at the economic crisis in emerging markets like Romania and India.

Submerging Markets

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SARAH PALIN: Somehow, Joe the Plumber...

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ADAM DAVIDSON, HOST:

Hi, and welcome to NPR's PLANET MONEY. I'm Adam Davidson.

LAURA CONAWAY, HOST:

And I'm Laura Conaway. It's Monday, October 27 - a really lovely day in New York City, where it's 3:06 p.m. We're going to take a look today at problems in emerging markets, and we're also going to check in on how the U.S. government is choosing which banks to save with its big capital injection plan.

DAVIDSON: Hint - they're not telling us. That's the one where the Treasury is going to buy stocks in the banks themselves. This means that the Treasury Department, rather than just overseeing the rules of the U.S. financial system, gets to actually pick winners and losers. Before I get to that, though, I just want to run down today's PLANET MONEY indicators. The stock market - we don't care about the stock market here. And today's a day - I mean, we care, but it's - we don't see it as a very important indicator. Right at this moment - the markets haven't closed - but it's pretty much exactly where it opened, although people were expecting a very bad day.

CONAWAY: (Laughter) All that for nothing.

DAVIDSON: All that for nothing - the TED spread, our measure of global anxiety, is creeping up a tiny bit. It's a 2.75. That's up from 2.67 at the open, up around 2.7%. But way, way, way below the near five it reached last week and in previous weeks. So it's sort of halfway to where we want it to be - in the well-below-one range that would indicate normal, relaxed, calm lending around the world. It's still at very troubled levels but nowhere near the highs we saw before.

CONAWAY: Adam, we also have a question today from this listener named Chuck Tomlinson. He lives in Minneapolis-St. Paul, where he likes to have oatmeal for breakfast.

DAVIDSON: Does he enjoy brown sugar?

CONAWAY: He does. He's doing his part to hold up the sugar economy. Chuck checked in on Alan Greenspan's testimony to Congress last week. Did you catch any of that?

DAVIDSON: Yeah, it was a fascinating, fascinating thing, which we spent far too little time on. Greenspan talked about a flaw in the fundamental way the world works and his understanding...

CONAWAY: I'm hearing kuzzah (ph) when...

DAVIDSON: Yeah.

CONAWAY: ...He says that, yeah. So Greenspan said he was pretty sure that he knew exactly what caused our current economic straits, and that had Chuck Tomlinson of Minnesota with his oatmeal, wondering if anything is ever that simple.

CHUCK TOMLINSON: Greenspan also said that, you know, undeniably the original source of the crisis was the subprime mortgage market. And I was trying - and in some of the stuff I've been reading, both through this program and elsewhere, about whether that is really what's causing the credit crunch or is it that there's - the CDS market is what's piled up high on top of those - of all those - all the foreclosures and stuff that's going on. I'm wondering what - if anybody can oversimplify it for me and say, you know, no, it's not the mortgages so much as that everybody was leveraging so much on top of them.

DAVIDSON: Well, I think Chuck answered his own question really, really well. It was a great question and a great answer that he gave...

CONAWAY: Watch out...

DAVIDSON: ...Which is...

CONAWAY: ...We'll be out of a job.

DAVIDSON: Yeah, exactly - which is that there was too much leverage. We've spent a lot of time defining leverage, but basically banks and pension funds and investors and central banks and governments lent a lot more money than maybe they should have in a more prudent world. And now, they are retracting that lending. There was a bubble of lending, and now there's sort of the opposite - a burst bubble, a contracting of the amount of money out there available for people to borrow and use.

CONAWAY: So hold on, are you in the middle of disagreeing with Alan Greenspan?

DAVIDSON: No, no, I don't think so. I mean, I think what I'm saying is what we've heard - what Satyajit Das has said on this show and others have said on this show - which is that the subprime housing crisis, the CDS crisis...

CONAWAY: Credit default swap, I'll just say.

DAVIDSON: ...The overall - the credit default swap crisis, which we've done a lot - you know, Alex Blumberg had his wonderful stories on - are symptoms of a larger problem or the - these are the particular manifestations of a larger problem. It's not - Nouriel Roubini always says it's not a subprime housing problem; it's a subprime lending problem...

CONAWAY: OK.

DAVIDSON: ...That basically, there was so much money out there, and it was so hard for anyone lending money to make money that people were lending to riskier and riskier countries and riskier, riskier companies and on and on and on. So the fundamental problem that Alex and I talked about in The Giant Pool Of Money and elsewhere seems to be there was so much money looking for places to invest that they were giving too much money out to people who didn't deserve it. Now, we spent an hour explaining that on The Giant Pool Of Money, and we could have easily spent 12 hours. So that's a very brief version. But, you know, we're going to have this conversation that we actually recorded earlier with Arvind Subramanian in a moment that explains how that's impacting countries that had nothing to do with the subprime housing or CDS world.

CONAWAY: Yeah. Chuck Tomlinson?

DAVIDSON: But I will put it this way. In the current manifestation, you know, the - I'm trying to think of a good analogy. The subprime crisis is the actual flu, and the CDS is the sneeze that spreads the flu...

CONAWAY: Whew.

DAVIDSON: ...Or something like that.

CONAWAY: All right.

DAVIDSON: Yeah.

CONAWAY: Yeah, I'm going to put that in the halls of analogy...

DAVIDSON: Overused, overstretched...

CONAWAY: ...Fame. Yeah no - fame. Fame.

DAVIDSON: OK.

CONAWAY: Chuck, baby, we hope that helps.

DAVIDSON: Now, like I said...

CONAWAY: Let's play it.

DAVIDSON: ...Let's go look at the emerging markets with Arvind Subramanian, an economist and senior research fellow at the Peterson Institute in Washington. He explained to us that, you know, we keep hearing about this possibility of a global recession. And he's saying that we saw countries that we expected to have trouble having trouble, but now we're seeing this financial flu spread to places we never expected.

I wanted to start real basic. Here at PLANET MONEY, we try and avoid jargon - at least we try to avoid not defining it. You hear emerging markets all the time. What is an emerging market?

ARVIND SUBRAMANIAN: Well, I think the emerging markets is a term, I think, that's broadly given to those countries that are not part of the rich world. So these are basically the richer countries amongst the poorer countries. So you have a whole bunch of countries who are called developing countries, which is anything outside of Western Europe, Japan, Australia, Canada and North America. That constitutes the developing countries. But amongst them, the richer countries are called the emerging markets - for example, Brazil, Mexico in Latin America and Chile. In Africa, you have South Africa. In Europe, you have Hungary, Romania, the Baltics, Russia. And in Asia, of course, you have China, Korea, India, Indonesia and so on.

DAVIDSON: Now, you were telling me recently that everyone knew that some countries were in trouble - that when the crisis hit, some countries would be hit hard. You mentioned Hungary - I think Turkey.

SUBRAMANIAN: Hungary, Romania, the Baltics, Estonia, Latvia, Lithuania, Poland...

DAVIDSON: But...

SUBRAMANIAN: Yeah?

DAVIDSON: Yeah. These were countries that were not totally healthy, that we kind of expected to have trouble.

SUBRAMANIAN: Right.

DAVIDSON: But now it's getting bad for even the countries that we thought were in good shape.

SUBRAMANIAN: Exactly. The countries that we thought were always vulnerable were the ones you mentioned - predominantly Eastern Europe and Russia. And we thought they were vulnerable because they were sucking in huge amounts of capital from abroad. So the fear always was when, you know, capital started to move out - money started to move out of these countries - you know, you would get the classic problem that their currencies would come under pressure, and they would just not be able to meet whatever obligations were falling due. So that's kind of the...

DAVIDSON: Wait, wait, Arvind...

SUBRAMANIAN: Yeah, yeah.

DAVIDSON: I'm a little confused 'cause I would think, if someone's giving you a lot of money, that's good. I mean, if my salary is getting really high, I'm happy. If capital's pouring into my country, in Romania or Hungary or whatever, that's a good thing - to have money pouring in.

SUBRAMANIAN: Yes, Adam. On the one hand, it's a good thing because, after all, you borrow to build assets, which, in turn, give you an income in the future. But if you borrow a lot and use it not to build assets, but you use it to kind of spend it, then you may not have the money to pay back the money you've borrowed.

CONAWAY: Can you give us an example, Arvind, of a country that did it that way?

SUBRAMANIAN: Well, so - sure. Amongst kind of the vulnerable countries, take a country like, you know, let's say Romania, for example. Romania as a country was sucking in huge amounts of capital from abroad - in the sense that how much Romania was producing and how much it was consuming, there was a big gap. And that gap was something like, in the case of Romania, $23 billion in 2007. So that's, in a sense, the kind of borrowing binge that Romania was on.

CONAWAY: So they were spending...

SUBRAMANIAN: Now...

CONAWAY: ...More than they were producing.

SUBRAMANIAN: Exactly.

CONAWAY: OK.

SUBRAMANIAN: And that's what...

DAVIDSON: And the rest of the world was willing to lend them money because they figured they were a good bet.

SUBRAMANIAN: They were good bet. They would use that money well, and in the future, they would be able to repaid - repay the amount that they had borrowed. Now, it turns out that a combination of two things happened. One, Romania was spending this, but not all of it was going into building assets which produce a future income, which is used to repay the loans that you borrow.

DAVIDSON: You basically...

SUBRAMANIAN: Some of it...

DAVIDSON: ...Mean factories or some...

SUBRAMANIAN: Exactly.

DAVIDSON: ...Productive use that...

SUBRAMANIAN: Some productive use as opposed to either, you know, just buying goods from abroad - for example, cars, consumer goods, televisions, etc., etc. - which people just...

CONAWAY: This is sounding very familiar, Arvind.

SUBRAMANIAN: It's sounding like the U.S. of A, isn't it?

DAVIDSON: Yes (laughter).

SUBRAMANIAN: Exactly. So that's one reason that, you know, they were sucking in all this capital, which not all of it was going to produce things, productive assets, like, you know, building bridges and roads and factories and so on. So that's the first problem. The second problem is - it's a more subtle one, which is that even if you're doing all the good things, even if you're doing all the good things, if there's a panic on the part of foreign investors and they say, wow, you know, in this case, for example, the crisis, we called in this - we call this panic the flight to safety. All investors, for whatever reason, good or bad, rational or irrational, are taking all the dollars that they put in overseas markets, and they want to send it back to - and invest it in U.S. Treasuries, which everyone now thinks or considers the most safe investment, the most safe asset in these very, very tricky times. So...

DAVIDSON: So wait. But it's two things. So the first thing is Romania's fault.

SUBRAMANIAN: Correct.

DAVIDSON: They borrowed too much and had...

SUBRAMANIAN: Too much.

DAVIDSON: ...And, like the United States, lived beyond their means.

SUBRAMANIAN: Correct.

DAVIDSON: And the second thing is not their fault.

SUBRAMANIAN: Exactly.

DAVIDSON: It's just, they're unlucky enough to be around at a time when every bank and pension fund and central bank and government in the world is saying, boy, we have lent way too much money. We're bringing some of that money in. And any money that's at risky places, we're putting to the safest place in the world, the U.S. government.

SUBRAMANIAN: Exactly. And that is happening now, Adam, around - in not just, you know, Eastern Europe and the Baltics and Russia, but it's happening in Latin America. It's happening in Asia. And that's the sense in which now this crisis has truly become global.

DAVIDSON: What about something like the '97, '98 crisis in Asia that spread to Brazil and Russia that - where we saw riots in the streets. We saw leaderships deposed, mass - you know, mass transformation of the politics of many nations, huge human misery. Is it like that or less than that that we're facing?

SUBRAMANIAN: I kind of flip between optimism and pessimism in the following sense. There's one important respect in which, potentially, this crisis could be worse than in 1998. And that's the following - in the following sense - when, you know, the Asian financial crisis happened, the same things - you know, the currencies went into freefall; the banking systems collapsed, and, you know, lots of people, you know, lost their incomes and jobs, and, you know, there was a lot of disruption.

But the good news then was that as these countries were recovering from the crisis, their major exporting partners, their major trading partners - namely the U.S. and the EU, the advanced economies - were growing reasonably - at a reasonable clip. In fact, if you look at the figures for '98, '99 and 2000, the U.S. and the EU, you know, the advanced economies, were growing at something like 3.5%, which meant that these countries could, you know, after the crisis subsided, could kind of start exporting their way back out of the misery that they found themselves in. But this time around, the big difference is the health of their trading partners, namely the U.S. and the EU, is not very good. So those countries like Russia, Brazil, Venezuela that primarily rely on commodities for their export earnings, they're going to be very badly hit.

DAVIDSON: That was Arvind Subramanian of the Peterson Institute for International Economics.

CONAWAY: We got a check-in today from our friends at ProPublica. We'll link to them on our blog. Adam, you sort of jump-started a story with one of ProPublica's reporters, Paul Kiel. It has to do with the capital injection plan. It's this thing where the government is buying ownership stakes in healthy banks to try to save them.

DAVIDSON: So Paul, you and I met three days ago.

PAUL KIEL: Yeah.

DAVIDSON: And we had a quick chat. And I mentioned some things I was interested in. You then spent a day reporting and found out something interesting, which is that we have absolutely no idea how the U.S. government is going to choose which banks to save and which banks not to save.

KIEL: Right. Well, I was reading a lot of the reporting when they were developing the capital injection plan.

DAVIDSON: The plan to - for the U.S. government to spend $250 billion giving money to banks in return for an ownership share to make those banks healthy again, or at least a little bit healthier than they've been.

KIEL: Right. And it was always, you know, Treasury Department officials will release details in the future about just how this will happen. And so I kept on waiting for that. And then they finally have this sort of press conference where they roll it out. And they said, here's the two-page application. You need to sign up here - your name, email address. Here's your contact phone number.

DAVIDSON: This is for the banks.

KIEL: This is for the banks. Yes.

DAVIDSON: So the head of Bank of America or whatever comes down, writes his email address.

KIEL: Right. And so I was like, well, wait a minute, you know? What's the - there has to be some meat here, some content. So they laid out the process. And it's mainly that the bank approaches whatever regulatory agency oversees them, which is one of these four, you know, alphabet soup of agencies. And they talk a little bit. They send in their application. The regulatory looks at the bank and then tells the Treasury, you know, yea or nay, and that's it. And that was the extent of the detail of what is publicly available in terms of what they're going to be doing.

DAVIDSON: So if I can get across why this might be upsetting or disappointing news for an American taxpayer - we've been told that the U.S. banking system and - or at least many, many, parts of it have taken such huge risks that have failed to pay off that it has destabilized the entire U.S. economy, the entire world economy, and that we taxpayers need to spend $700 billion of our money to bail out these banks. We have given the U.S. government and the Treasury Department an unbelievable amount of power - very unusual for the U.S. - for the government to have the power truly to decide which banks succeed, which banks fail.

We might want to know that the banks that succeed will be the ones maybe that weren't the riskiest, or that the banks that are saved are not the ones that caused the problem the most, or we might want to at least have a sense that there's some fair and reasonable process. And you're - from what I hear so far, we have no idea if there's a fair and reasonable process 'cause we have no idea what the process is at all for one of the most important decisions the government will make.

KIEL: Right. And when they're pressed on it, all they say is healthy banks. We want to do this for healthy banks.

DAVIDSON: We're going to save healthy banks.

CONAWAY: Paul, do you think there are banks that will fail as a result of not getting a capital injection from the U.S. government?

KIEL: Well, I think - I mean, one thing of it, I mean, I hear from economists is that it - what you want is for the bad banks to fail. You want to sort of - you want to sort the good from the bad. And what you really don't want to do is give this sort of money to bad banks so that they can either, you know, try to get themselves out of a hole with somewhat, you know, risky behavior or just sort of - you know, the way it sort of happened to Japan in the '90s - just sort of continue. They have enough life in them to stick around, but they're not actually - there's no systemic recovery. They're - they just - you just sort of helped them get along for a little bit longer period of time.

CONAWAY: But do you think there are ones that will keel over?

KIEL: Yeah, which is - one part of this is, if a bank is denied, it's not going to be public. Because if it were public, you're just basically signaling to everyone that this is a bank that, you know, the government has no confidence in. And so you have the danger of - if there's a run on the bank, you essentially doom that bank. So the way it works is, you know - the process they've laid out is, you know, the bank does the - goes through the application process in secret. And then if they get the capital injection, shortly thereafter it'll be announced. If they're denied, it's sort of kept quiet.

DAVIDSON: Now, so that might be a reason why they don't want to tell us their process - right? - that there is a danger to being too transparent in this case.

KIEL: Well, you could also say, well, you know, true criteria would be - we want banks to have a certain amount of capital on hand. We want them to have a certain, you know, capital ratio or however you want to put it - a certain real health to them. But there's a particular important bank whose - you know, if they were to go down, it'd create a systemic problem. So they might want to bend the rules a little bit - you know, bend their own internal criteria 'cause, apparently, there are - they do actually have some criteria for this.

So that's their argument, I think, for not being more explicit in terms of how they're going to do this. I mean, the answer to that is we basically have to trust them. And if you want to make a sort of critique about how they're doing things or any sort of transparency in how the process is happening and expose it for certain flaws in it or doing the wrong thing, we don't know because we don't know how they're making these decisions.

DAVIDSON: I don't want to say this was a co-produced story between PLANET MONEY and Paul Kiel and ProPublica, which is at, by the way, propublica.org - they asked me to make sure to say - but it was great to work together on something. I really like working with those guys, and I hope we work with them some more - dig some stories up. They're a special, new - brand-new investigative reporting service, and I think they're up to some really important work.

CONAWAY: So, Adam, I think that's it for PLANET MONEY today. And I think this is the part where I say, I'm Laura Conaway.

DAVIDSON: And this is when I say, I'm Adam Davidson.

CONAWAY: Check us out online at npr.org/money. Caitlin Kenney produces and directs this podcast, among other daily miracles. Caitlin is collecting economy-themed Halloween pictures for our blog.

DAVIDSON: I can't wait to see that. And whatever you're seeing in the economy out there - whether it's foreclosure signs or notes about people going out of business, or even good news, if you're seeing any - whatever you're seeing, please do send pictures. We want to populate our blog with lovely pictures or sad pictures of how the economy is doing. Also, tune in tomorrow and every weekday for another episode. And meanwhile, thank you for listening.

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