MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The global stock freefall that wiped out nearly $3 trillion in value in recent days appears to be easing, but perhaps not in China. After another day of sharp losses for investors in the Chinese stock market, the Chinese government lowered interest rates for the fifth in 12 months. Joining me to talk about the global sell-off, what it means for the U.S. economy, Derek Scissors of the American Enterprise Institute.

MS. DIANE REHMJoining us by phone from Claremont, California, Minxin Pei of Claremont McKenna College and by phone from Ann Arbor, Michigan, Kenneth Lieberthal of the Brookings Institution. I'm sure many of you will want to join us with your questions and comments. Give us a call at 800-433-8850. Send an email to drshow@wamu.org. Follow us on Facebook or send us a tweet. And thank you all for joining us.

MR. DEREK SCISSORSThanks for having me.

MR. KENNETH LIEBERTHALOur pleasure.

REHMGood to have you all. And Derek Scissors, of course the drop in the Chinese market continued, but Europe, the U.S., don't seem to be following suit. Tell us what you think is going on.

SCISSORSWell, you know, we have -- you have a good group here. I'm the novice in this group and I've been studying the Chinese economy for more than 20 years so you're getting a different view than you'd get from people who'd just been paying attention for the last few months. The weird part is not that Europe and the U.S. have now diverged this morning, so far, from Shanghai and Asia, too.

SCISSORSThe weird part is that they followed them in the first place. Chinese stocks are not really connected to the Chinese economy. They're certainly not connected to the global economy as a whole. They matter to certain things like exchange rates, but the idea that the U.S. stock market route and stock market declines elsewhere were driven by China is very strange, doesn't seem reasonable and shouldn't last.

REHMHow do you see it, Minxin Pei?

MR. MINXIN PEIWell, I think this time the routing overseas markets, U.S., Europe and the rest of the world, was more driven by China's devaluation and perception of a Chinese economy is in deep, deep trouble. That's far more consequential than the routing the Chinese market alone.

REHMAnd to you, Ken Lieberthal.

LIEBERTHALWell, I agree that I think this was driven primarily by perceptions that we just don't know what's going on in China, but it sounds like the news is not good. And given China's role in the past as a major driver of global growth, and given broader uncertainties about the global economy now and prospects for future growth, I think that it's really sentiment that drove the market outside of China and I think rightly, Derek Scissors was exactly right, that the Chinese stock market connection to markets elsewhere is really miniscule.

REHMCan you follow that up, Ken Lieberthal, with talking about why China is devaluing for a fifth time its currency?

LIEBERTHALWell, I think actually I disagree with the notion that there is a program of devaluation going on in China. The Chinese currency effectively rose in value with the U.S. currency against the euro, the yang, with partners that China trades with, China's currency has become much more valuable over the past year, roughly. China has been under some pressure from the IMF to have its currency determined more by real market forces.

LIEBERTHALAnd it began to do that in a relatively minor way a couple of weeks ago. It was seen as a devaluation or the potential start of a serious set of policy moves to devalue. That created a storm internationally and a lot of concern internationally. And the Chinese, within a couple of days, backed off from that and have intervened again to keep the currency basically steady vis a vis the dollar.

LIEBERTHALMinor additional decline in currency. But the reality is we're seeing China's currency move toward its real market-determined value. That is something we've encouraged the Chinese to do for years. I think that initial step in that direction, though, was handled in a kind of ham-fisted way by the Chinese and that created a lot of the upset globally and the impact globally.

REHMMinxin Pei.

PEIOh, yes. I think there was good technical reason for China to devalue because over the last year or two, other currencies, against the dollar, have fallen, depreciated, while the Chinese currency has held steady. So the Chinese currency, in strict technical terms, may be overvalued so there is a reason to adjust. But the timing cannot be worse, that is this adjustment came in the wake of China's stock market route and also a day or two after the devaluation could Chinese economic activities as measured by various surveys showed that they were at the lowest in the last five or six years.

PEISo the perception was there that China is in desperate trouble and its leaders wanted to use devaluation to stimulate exports. If that's the case, then the global economy is in deep trouble. That's why that contagion occurred.

REHMDerek Scissors.

SCISSORSI mean, I agree with everything my colleagues have said. I'm going to put some of the blame for this on traders. It doesn't make -- this is an overreaction to recent events. I mean, my colleagues may disagree. I think the Chinese economy has been weakening for seven years now. Most people would say three or four. That's not new. Chinese debt is not new. The upward pressure on China's currency because it's pegged to the dollar and the dollar is so strong is not new.

SCISSORSChinese cycles and equities, boom and bust cycles in their stocks are not new. So I feel like this level of panic over the last week or so isn't justified by any fresh developments. It looks the straw that broke the camel's back and maybe it's more than one piece of straw, but China must've piled onto some other burden where people were worried, as has been referred to, about other things in the global economy.

SCISSORSNow, this can't really be a reaction to new developments in China because the new developments are minor compared to the stock sell-off around the world.

REHMBut it's fascinating that so much of world followed after China's market drop.

SCISSORSRight, right. I think if you have a situation of global fragility, not just in one area -- in the U.S., we might think of this as odd in the United States. We're considered a strong point in the global economy. We're, you know, everybody looks at the U.S. and goes, oh, the U.S. is doing great. I wish we were doing that well. And we're here thinking, you know, things aren't that good. They're okay, maybe.

SCISSORSSo what you have on the devaluation side is there are economies, countries that compete very closely with China, which the U.S. is not one, but in the region, Korea, Singapore. They're hypersensitive to a Chinese devaluation because the competition is so tight. So that puts pressure on them. And then, you get this contagion effect through trade where countries are, you know, if you see it's not just China, it's also Korea, Singapore, et cetera, then other countries, you know, stock markets follow and it spreads around the world because of global economic weakness.

REHMBut why should the United States follow suit if, in fact, as you say, it's strong basically? And after all, it's not individual traders at work. It's computers.

SCISSORSI think that's a really good question and I confess to not being a U.S. stock market expert. I do think the U.S. reaction was overdone. The U.S. economy is not that strongly affected by China because we're so big compared to a bunch of smaller economies that are affected by China. There isn't, as my colleagues have also noted, a link between Chinese stocks and the U.S. stocks historically.

SCISSORSSo I think we're going to come back from this, but I think the extent of the decline has to be explained by China adding to other worries and I think the other worries are things like the Fed and low U.S. labor force participation and oil prices, you know, staying really, really weak and hurting U.S. shale. But all I'm trying to say here is China doesn't seem to explain this to me. I know everyone's grabbing onto China as the event and sure it can be the trigger, but something else has got to be going on as well.

REHMMinxin Pei, what else is going on?

PEIOh, I think -- I want to add two things. One is why the U.S. stock market has fallen because of China. There are several reasons. One is China is a huge consumer of energy so if China's economy's in trouble, energy demand will be lower and then oil prices were low. So a lot of oil companies have seen their shares fall dramatically over the last few days. The other is several U.S. companies depend on China for their revenue and profit gross. Apple, for example. Apple's share got savaged over the last few days because iPhone sales will be lower in China.

PEIAnd the other reason I want to add is that people really do now know what's going on in China. China has a huge economy, but it's transparency is very low. We do not know how deep the trouble is so when in doubt, you always pull the trigger and sell.

REHMYou know, it's interesting you mention Apple because Apple's director got up and was reassuring everybody yesterday that Apple was doing just fine. The other issue is commodities. It's the commodities that took the big hit.

SCISSORSWell, I'll just jump in here. I'm sure Professor Lieberthal has plenty to say. I'll be brief. The commodities hit is also not new. It's absolutely true that as Minxin just said that China has undermined global commodities demand and driven down global gas and metals prices. U.S. consumers have benefitted from that and it happened, you know, starting several years ago. So that's a bit effect on the world economy and China's economy matters, but it's not new.

REHMDerek Scissors, he's resident scholar at the American Enterprise Institute. Short break, we'll be right back.

REHMAnd welcome back. We're talking about the wild ride on Wall Street and in China's stock market that occurred yesterday. And, in China today, that continued with something like a 7 percent additional drop. Here in the studio, Derek Scissors of the American Enterprise Institute. Minxin Pei, professor of government, he's on the line with us from Claremont McKenna College. And Kenneth Lieberthal, senior fellow, and he is at the Brookings Institution. He's co-author of the book, "Barack Obama: His Foreign Policy."

REHMHere's our first email. It's from Ben in Hudson, N.H. Ken Lieberthal, Ben says, "Does this devaluation increase the likelihood that other countries will adopt the Yuan as their reserve currency? And is the dollar really strong or is it being propped up by the Fed?"

LIEBERTHALThe IMF has made clear to China that, if China's currency is to be included in the group of currencies that the IMF deems worthy of holding as reserve currencies, that a number of reforms have to take place. But one of those is that the currency -- the value of the currency has to be fundamentally determined by market forces. And so the Chinese have said that they're going to move in that direction. And I think that what's being called devaluation, as I indicated earlier, is really an initial step -- one of many that will occur as China tries to get its currency to -- closer to market value, market determination.

LIEBERTHALThe monetary policies of countries can have an impact on the value of their currencies. And the easing policy by our Fed that has now been in place since the global financial crisis certainly has impacted the value of the U.S. currency. But I think the fundamentals of our currency, even with that easing, the currency on a day-to-day basis is determined by market forces.

REHMDerek.

LIEBERTHALWe don't have government intervention to prop it up today or let it drop tomorrow and to set a benchmark each day. And I think that that is what we've been concerned about with China, that their government intervention is really critical to what happens to that currency day by day.

SCISSORSI mean, I have a very particular opinion on this. China certainly has the capacity -- in response to the question from Ben -- the capacity to have an independent currency that a lot of countries follow. They are not doing anything like that now and this devaluation and technical change was a very small move in that direction. Right now, the Yuan is an instrument, a derivative of the dollar. It follows the dollar slavishly around on global foreign exchange markets, just, you know, Professor Lieberthal mentioned, the Yuan has risen against the euro and the yen because the dollar has risen against the euro and the yen.

SCISSORSSo, right now, China does not have an independent currency. It completely follows the dollar. China has the capacity to move to having that kind of currency. But, right -- the dollar is king on global foreign exchange markets right now and the Yuan is a servant of the dollar.

REHMAt the same time, there are some people who said that the fluctuation in the U.S. stock market not only was because of what was happening in China, but in anticipation of the Fed raising interest rates in this country.

SCISSORSYeah. Again, the Fed move has been discussed ad nauseam, right?

REHMI know.

SCISSORSAnd probably been discussed five times on this show...

REHMRight.

SCISSORS...much less everywhere else in the world. So I don't see how that can be a surprise that would change U.S. markets. I do think, you know, I think the Fed -- a Fed increase is overdue. Maybe the timing in September isn't that good. Maybe it should have been a year ago. So maybe we're at a vulnerable point. I think Minxin talked about that, this being particularly bad timing for China. Maybe it's particularly bad timing for the U.S. But, again, it's not new. And the dollar's strength has built in that Fed move. The dollar has been strong partly in anticipation of the Fed moving interest rates higher. Why would the stock market be surprised by this?

REHMBut the stock market was falling even before...

SCISSORSMm-hmm.

REHM...China's stock market fell, in anticipation of the Fed's move.

SCISSORSRight. And that's -- so I think there's been an environment of stock market weakness in the U.S. And traders were looking for an excuse to sell. And I think Minxin made a good point earlier, saying there's so much uncertainty about the Chinese economy...

REHMYeah.

SCISSORS...you know, where we don't trust government data. And so every time there's a surprise, you think it's much worse than they're saying because they don't seem to tell the truth on a regular basis. So it's an excuse to sell, where people were looking for an excuse to sell and China provided one.

REHMMinxin Pei, you've said that the Chinese government made two key missteps in the last few weeks. Tell us what you believe they were.

PEIYeah. The first mistake they made was to jump into the stock market bubble and try to pop it up. And that occurred roughly five weeks ago, I think we were on the show. And it turned out that the Chinese market -- the Chinese government got into the stock market way too early, when share prices were too high to be supported. So five weeks later, after spending something like $200 billion to keep share prices up, the Chinese government gave up. So, in the last two days, the stock market collapsed -- 15 days -- falling roughly at 16 percent in two trading sessions. And so that added a lot of confusion in the market. So that's one. In the meantime, they spent $200 billion, which could have been spent elsewhere more productively.

PEIThe other mistake, as I said, was the decision to devalue. They really did not communicate with the market well. And the market hates surprises. So if the Chinese government did a somewhat better job in explaining its move, telegraphing its move, then it might have avoided the bloodbath in the stock market.

REHMAnd tell us about the Chinese people themselves, who invested in that stock market -- were indeed encouraged to invest in the Chinese stock market -- and how they have been hit.

PEIWell, the government, at the beginning of the year, used its official press to encourage people to invest in the stock market, saying that the market is undervalued, the economy is good, and 4,000 index of -- 4,000 points in the Shanghai Stock Index, today it's trading around 300 -- 3,000 -- it's just the beginning of the bull market. So people were encouraged. And a lot of people jumped into the market and they lost a lot of money.

REHMAnd you're talking about small investors as well as large ones.

PEIWell, in China, mostly it's small investors, retail investor -- 80 percent of the people who trade in the stock market in China are retail investors.

REHMAnd...

PEIBut these are not ordinary people. The -- most of them are pretty wealthy people, middle class, upper middle class wealthy people.

REHMSo...

PEISo (unintelligible)

REHMHow much would they have put in, individually, on average?

PEIWell, nobody knows because there were two pots of money. One would be their own money, the other would be borrowed money. And those who have borrowed have been really wiped out.

REHMSo they borrowed money to go into the stock market at the government's encouragement?

PEIYes. Well, the government encouraged -- did not specifically encourage them to borrow. But when they see this huge boom in the market, they say, "If my neighbor can make a bundle of money, why can't I?" So that's why the market has -- well it rose very fast on borrowed money and collapsed very fast because of borrowing.

REHMSo what happens to those people?

SCISSORSWell, they feel betrayed by the government, there's no question. I think this is the first time Minxin's ever been accused of this, but I think he's being too nice to the Chinese government in this situation. They encouraged the market from last year. And, as he said, they said, "4,000, that's not enough." And there were multiple opportunities for the government to discourage the market rise after it had progressed a reasonable way, to tighten up borrowing on the margins, to tighten up ability to say, "I'm sorry, you cannot borrow that much." And they didn't do it.

SCISSORSSo the people, you know, those people were betting on government policy. There was no, "I'm looking at the profitability of these companies." They made a bet purely on government policy. And as has just been said, the government had opportunities to be reasonable, didn't take them, and then reversed its policy. So ordinary Chinese who were involved in the market -- and, again, they are not, you know, it's not the masses -- it's people who are well off, it's 150 million people who are doing pretty well in China. Nonetheless, they do feel betrayed. The government told them one thing and then changed its mind.

REHMAnd, Ken Lieberthal, what does that betrayal -- how does that manifest itself in the reactions of those people who took the government's word for it?

LIEBERTHALWell, I think they're feeling like they were led down the garden path and very badly advised. The -- I don't think that leads them to decide that they need to change the kind of government they have. But the -- there's -- really the fundamental issue here is one of the quality of Chinese decision making and the capacity of the top leaders to shape the way the economy performs. And everyone is aware that the economy is in a difficult period, that they have to undertake major reforms, which they've made clear they want to do. But these recent events highlight that the decision making at the top is sometimes very ham-handed.

LIEBERTHALAnd more than that, even when they decide to jump in and try to pump up the market or to stimulate various parts of the economy, they don't really have the tools now to do that effectively. And I think that combination has people really worried about what the future holds, how effective reform will be, how sustainable it will be, and what the implications are for the second-largest economy in the world.

REHMAll right. I'm going to open the phones now. We have a caller in Tallahassee, Fla. Dominic, you're on the air. Go right ahead, please.

DOMINICYes. I'm thinking -- thank you for accepting my call.

REHMCertainly.

DOMINICI'm thinking that the Chinese market correction is just a red herring. The U.S. stock market was an accident waiting to happen for years. The banksters have been doing the derivatives and financial shenanigans even more than they did in 2007. And the major banks are a bigger part of the economy than they were in those days. So it was only inevitable that this was going to happen. In contrast to the savings and loan crisis in the late '80s, where 5,000 bankers were indicted and almost 1,000 went to jail, here nothing was done and I don't think anyone was prosecuted in it at all.

REHMAll right. Is the Chinese problem a red herring?

SCISSORSYou know, that -- I would say I partly agree with the caller. I do think that there are some issues in the U.S. stock market that needed to be worked out, that got worked out rather quickly and dramatically because of the Chinese prompt. But the issues were there before. We have had, as you referred to and my colleagues have referred to, long -- many years -- I think Professor Lieberthal said this -- we've now had six, seven years of stimulative Fed policy. That's not normal. And the asset markets in the U.S. are not in a normal period where you hold interest rates near zero for a long period of time.

SCISSORSSo you can look at that and say there needs to be an adjustment at some point and apparently a lot of traders decided the adjustment was going to be now. And that may have been pushed by China. But I do think that we're in an unusual situation in the U.S. and that's the backdrop for all this.

REHMAnd you're listening to "The Diane Rehm Show." Here's another email, this from George. He says, "It's my understanding some American investors make great sums of money on the movement of our stock market, regardless of direction. Is this the case in China as well, given the apparent close control the government there exercises on their market? Ken Lieberthal.

LIEBERTHALThe answer is yes. In China or here, if you know the direction in which a stock is going to move, you have ways of betting on what the stock price will be in the future and you can make a very large amount of money doing it.

REHMAnd now, turning to our own stock market, Rachel says, "Remember, the U.S. stock market was at 7,000 when Obama took office as president. It's gone up some 10,000 points while he was in office, more than doubled. There's really not much to worry about a 1,000 point drop now. It just got too high.

SCISSORSThat's a completely reasonable view. I think that's probably right. But while you're having the 1,000 point drop -- especially if it happens in three days or, you know, two-and-a-half days, as has just happened -- you're really not sure where the bottom is. And that's really the theme here. I think -- and my colleagues have referred to this repeatedly -- there's a lot of uncertainty about China and it got imported into the United States, which is not -- 1,000 point drop, fine. What if it's not 1,000 point drop? What if it's a 2,000 point drop? What if it's a 4,000 point drop? We're still way up under President Obama, you know? How do you know where the bottom is?

SCISSORSIf you feel like the world economy is weak and the Chinese economy, which is very important to the world economy, is not only weak but really unclear, we imported some of that uncertainty. So 1,000 points is nothing. But if it's just 1,000 points, that's one issue. If we're not sure that it's just 1,000 points, that's the scary thing.

REHMWhere are you in your own thinking?

SCISSORSAs I said from the beginning, I just don't think Chinese stocks matter that much to the U.S. I don't think there's new developments in China that matter that much to the U.S. I agree with Professor Lieberthal and Minxin Pei that Chinese decision making has been questionable over the last several months and that's a downward factor for U.S. markets, but it's not a big downward factor. Our future doesn't rely on Chinese decision making, thankfully. Maybe, unfortunately, it relies on our own decision making. That's the real issue. So I think we've pretty much -- we're pretty much done with the China problem in the U.S. markets. We still have the U.S. problem in the U.S. markets.

REHMAllan Sloan, writing in this morning's Washington Post, says "This feels like a market decline, not a massacre." Would you agree with that, Minxin Pei?

PEIWell, it depends where you are. I think, in the U.S., it's a market decline. If you're in China, it certainly feels like a massacre. If you are in Brazil or other developing countries, their markets have been hit really hard. And so, in the U.S., I agree with what Derek said. The U.S. market is very overvalued so there is correction overdue. And, but the U.S. economy is the brightest of all the economies in the world. So there's a reason for the U.S. market to be better. So if I were purely invested in the U.S. markets, I'm not going to be very worried.

REHMAll right. Minxin Pei, he's professor of government at Claremont McKenna College. We'll take a short break here and, when we come back, callers in St. Louis, Dallas and Aventura, Fla. Short break.

REHMAnd welcome back as we talk about fluctuating stock markets around the world. Let's go to St. Louis, Missouri. Arthur, you're on the air. Go right ahead.

ARTHURThank you. Let me give you something to worry about. The subprime mortgage market in the United States turned the world upside-down. The total mortgage market in the United States is roughly $14 trillion. The world debt today is $230 trillion and growing every minute. Total annual output is $75 trillion. Debt is now at 300 percent of annual output, and virtually every country is increasing the debt either through sovereign debt or commercial debt.

REHMArthur, as if I didn't have enough to worry about, you've really made my day. Respond, if you would.

REHMI mean, I think this is the kind of thing that makes people get defensive. So we're talking about an event that just happened in China against a backdrop of global economic weakness. And that's -- those are instances of global economic weakness. If you want to be scared, you've got plenty of reasons to be scared. This isn't -- this isn't everything's fine, and oh, China threw a monkey wrench into the works, and we'll get over it, and in September everything will be great. There will be reasons, if China stabilized, which I'm not sure it will, necessarily, outside the stock market, but if China stabilized there would still be reasons to worry in the U.S. and in the global economy, and that's what causes traders to push sell buttons.

REHMWhat's your take, Minxin Pei?

PEIYeah, I would say that debt per se is not a problem because it depends on what the debt is being used for, how fast the debt is growing. And let me just go back to China. China has debt to GDP of around 280 percent, which is high for a developing country, and actually most -- a lot of China's economic problems are associated with the debt. The problem with Chinese debt in this specific case is that it's been growing too fast. When debt grows too fast, you run risks of debt default because a lot of borrowers may not actually have the ability to repay.

PEIThe other problem with China is it does not have a clear plan to deal with its debt. So for the last three years under this new leadership, it has repeatedly delayed addressing the debt problem. So the market is getting rather anxious, if not has lost it patience.

REHMAnd how do you see it, Ken Lieberthal?

LIEBERTHALI think when you look at the U.S. economy, the big market impact, I think, that people have to be concerned is when the Fed begins to come off of its monetary easing, whether it's in September or later this year, and has a positive interest rate and increases the cost of capital. Then I think the -- a lot of the market growth in the past few years has been that people can't make a reasonable return on U.S. government debt, so they put money into the market.

LIEBERTHALIf that government debt provides a better return, the impact on the market, frankly, is just unclear, but I think all of the asset managers have been saying effectively people need to start rebalancing. But I think folks are still waiting to see when the Fed actually moves. And so that is certainly added to the uncertainty out there, this impact in our market responses as things develop.

REHMHere's an email from Leo in Akron, Ohio. Says, please talk about the bigger problem on the horizon when it comes to China, the inevitable bursting of their real estate bubble. This week's hysteria will pale in comparison when that occurs. Minxin?

PEIYeah, I think the real estate bubble has been there in China for about three or four years, and all of us -- most of us are scratching our heads why it has not burst. The reason is simple. Right now, the Chinese government is not calling -- is not making the banks to call back the loans. And we want to see when the Chinese government orders the banks to actually clean up their books. If that happens, then the bubble will burst.

PEIRight now, you have stagnation in the real estate market. It's neither going up nor really collapsing. And if the market really collapses then the immediate problem is that you're going to have a lot of bad debt in the banking system, and that can cause a financial -- I don't want to say crisis, a really huge financial problem for the Chinese government.

REHMDo you agree, Derek?

SCISSORSI agree in the longer term. I think we're actually going to see the Chinese property market rise in the short term. We just had an interest rate cut. We're going to have money flowing out of stocks, looking for someplace to go. It is still quite hard in China to send your money overseas. You're mostly limited to domestic options, and just like everywhere else, if stocks are not a good option, people put money in property.

SCISSORSDevelopers have been able to borrow recently very easily. It's not difficult for them to create more projects, whether they're good projects or bad projects. So I do think there's a Chinese property problem. In the short term, I actually expect Chinese property to do relatively well. That may not be a healthy development for the Chinese economy in the long term, but I think when people look at Chinese property and think the bubble's about to pop, the bubble's about to pop, probably the bubble's going to get bigger before it pops.

REHMNow hasn't the Chinese government been deliberately moving hundreds of thousands of people from the farmlands into the cities and creating housing for them?

SCISSORSRight, there's a segmentation, yes. There's a segmentation, though, in the property market. That is really public housing, and it's subsidized directly by the government, and the prices are very much controlled. You know, the people who are really being pushed into urbanization, which is one group of people who are urbanizing, that I don't think you really think of as commercial property.

SCISSORSThere's another segment which also has people who are urbanizing on their own, moving to where there are opportunities insofar as they can, given Chinese legal restrictions, and you have commercial developers taking away farmland, the standard story of Chinese property. That's where I think prices are going to rise, and things are going to look better for a while. But I agree with the fundamental point made by the caller and by Minxin that there are dangers in the property market. I just think we're going to get a perhaps surprising expansion before we get a real problem.

REHMAll right, and to Detroit, Michigan. Hi Susan, you're on the air.

SUSANHi Diane, thank you. I'm just curious. Nobody is talking about the mutual funds and all the investments that PIMCO and several other mutual funds have in emerging markets. I mean, they've increased from in 2009, from $9 billion to $154 billion today. And if that has any kind of effect on what's going on in the markets today, it's, you know, a really large amount of money.

SCISSORSYeah, I mean this is -- we've had, and because the Fed and other central banks have kept the return, and Professor Lieberthal referred to this earlier, have kept the price, the return on money so low, what you've had is yield chasing, which is these big financial organizations looking for yield anywhere in the world, and there are actually pretty good yields in the U.S., but they'll run into emerging markets. Oh my goodness, you know, four percent, this is fantastic because U.S. government debt is so poor, and savings rates are so poor. So that's part of it.

SCISSORSThey're chasing yields all around the world, and so the world matters more to these financial institutions. It doesn't matter to everyday Americans, but part of the stock market turmoil, the instability, is these financial organizations shifting out of emerging markets. Minxin mentioned this. A lot of money left emerging markets because there is a perception that we chased yield, we went for any little gain we could get in these markets, and now there's too much uncertainty, and we want out.

REHMMinxin?

PEIYes, I think this is not going to be a problem for the U.S. financial system. It will be a problem for retired -- for those of who are saving for retirement because we allocate money to emerging markets. And that portion of our investment actually has suffered much more than our allocation to, say, European markets or American markets.

REHMKen Lieberthal, which countries are going to most affected by the Chinese slowdown, if there is one?

LIEBERTHALI think the countries surrounding China in Asia. Derek mention this earlier, South Korea, Japan, Taiwan, Vietnam, Malaysia. These countries are -- depend on Chinese growth, depend on participating in Chinese growth for a large part of their future economic growth. And so as Chinese growth becomes more problematic, they worry a great deal and for good reason.

REHMWe hadn't talked at all about the energy sector, Derek, and how this may be affecting what's roiling everything.

SCISSORSRight, well, we had, as we discussed, the fact that Chinese -- the Chinese economy slowed, their demand for energy slowed. That has a big factor in the oil price drop. And I think what happened on the energy side is people thought $45 a barrel crude oil, that's as low as we're going to go. I mean, come on, we're not going any lower than that. And that's been a surprise because we already had weakness in this market.

SCISSORSWe talked about how the U.S. stock market may be overvalued. Weakness in U.S. stocks shouldn’t be that much of a surprise, but weakness in oil was a surprise, and people don't know how to respond to that. Wait, wait, $45 was supposed to be the low, not $37. How bad is this going to get? What does this mean for global growth that no one's going to want to buy oil? So this is another sore -- you know, when I've been -- I've been emphasizing where are the new developments. Even though the oil percentage drop is not that large, the fact that there's a drop from what we thought were really deep lows is a new development, and it's affected energy stocks in energy-selling countries.

REHMAll right, to Bill in Dallas, Texas. Go right ahead, sir.

BILLThank you so much Diane. I would like to hear the panel's comments on something that occurred to me as I was listening to the discussion, something that could maybe not considerably as much weight as how different these stock markets in the U.S. as opposed to China, for example. Most of the investing here, really most of the decision-making, is made by a decision tree and computer-based investing. Somebody was talking on mutual funds and investing like that.

BILLBut in China, as the panel has mentioned earlier, 80 percent of the investing is small investors. So there -- and again, one of the panelists said if you want to be afraid, you can be afraid. In China, it seems to me that sort of gambling takes place much more easily, and so that affects things, which in turn affects computer-based software, which is going to make the market go up or down. And I really just -- I always wonder if that's not really the main factor driving these giant momentum swings.

REHMMinxin?

PEIWell, I would say that the U.S. market is a much more mature, sophisticated market, driven largely by institutional investors. And in China, as we all know, it's retail investing, and it's all about psychology of individuals. The problem with China in the last couple of weeks is that there's additional play. The government has jumped in. All of a sudden, the government has trillions of Yuan to invest in the market. So that makes calculation even more difficult.

PEIAnd so when in the last couple of days, when investors perceive that the government is no longer there to support the market, then the market falls like a rock.

REHMThe government is no longer there to support.

SCISSORSI mean, I think what -- first of all, I think the government did the right thing, actually, this week, after doing the wrong thing for months and months and months, which is to say to traders look, you know, buy and sell at your own risk, not with us coming in and supporting the market all the time. So better late than never, I guess. I wish they had told us in advance what they were going to do, but they have done the right thing.

SCISSORSBefore, the government was supporting the market. They may not be now, or they are supporting it at a lower level. That's healthy for China.

REHMAnd you're listening to the Diane Rehm Show. Ken Lieberthal, what about ordinary Americans? How are they being affected? I gather many, many Americans have very little invested in the stock market.

LIEBERTHALI think American investing in the stock market for ordinary people tends to be more through things like their pension schemes, you know, their 401 (k) s or, you know, their corporate pension schemes, where those funds are invested broadly. A lot is investing in investments that will be heard if the U.S. market goes down or, as we were discussing earlier, a lot of these investments have gone global, seeking higher returns.

LIEBERTHALSo it isn't so much the individual choices of American investors who -- you know, for the largest number of people who have very little direct money in the market, but it's what they don't see happening. It's the money that's being put away for the future that is invested in instruments that really can be affected by the market.

REHMAnd one last caller, Solomon in Greensboro, North Carolina. You're on the air.

SOLOMONThank you. Yeah, a couple of observations, we'll get to what he was talking about today, is wealth is not created by the stockholders or the investors. Wealth is created by only one thing, and that's labor and the workers, who have been devalued throughout the world because if I have money to invest, it depends on somebody's labor. I didn't do anything for it, and the stockholders who are the same thing. And my other question is if the United States is in debt, and the whole world is in debt, who owes that debt, and who do they owe it to?

REHMDerek?

SCISSORSWell, that's a fun -- that second question is a really fun question because one of the reasons you don't worry as much about debt is that somebody's owed the money, and so, you know, so one person's debt is another person's credit. I think Minxin said this right. What you want is to have productive use of debt. And that's the way a lot of people criticize government borrowing because it's not productive, or they criticize Chinese -- you know, China, you know, in some ways borrowed money to intervene in the stock market. That wasn't productive.

SCISSORSI will say one thing just quickly. A lot of -- some people, some politicians have put the -- have said that, well, this just shows we shouldn't depend on China buying our U.S. government debt, and that issue is really overblown. China's holdings of U.S. government debt are not that large. They're not easily sold. Our debt is our problem and sort of similar to the whole stock market issue. We have problems in this country we need to face up like our debt. China's role in them for us is pretty small. China's role in the world can be quite large, but in the U.S., the Chinese role is actually smaller.

REHMAny predictions as to what's likely to happen over the next few days, very briefly?

SCISSORSI think U.S., you know, I've been on the air, but I suspect U.S. stocks are still doing well today. I think Chinese stocks will do well tomorrow. I think we will see some stabilization, and that's good and should happen. I'm not sure that that solves the long-term problems.

REHMMinxin, where do you see it going, very briefly?

PEII think overseas markets outside of China will do well. China itself will continue to struggle.

REHMAnd Ken Lieberthal?

LIEBERTHALI am not in the business of predicting how the market is going to go the next day or two. I learned my lesson on that a long time ago. But I do think the big issue is how China's economy is going to perform going forward, and I think that that's really what we need to focus on.

REHMAll right, Kenneth Lieberthal, Minxin Pei, Derek Scissors, thank you all so much, and thanks, all, for listening. I'm Diane Rehm.