By Kaufmann | April 23, 2009 5 Comments »
There has been increasing attention paid to whether regulatory capture, as well as other forms of state capture, played a role in the financial crisis. Less attention has been paid to whether capture of the media, and of the financial media in particular, also took place, and what role, if any it had in the financial crisis. Lionel Barber, the highly respected editor of UK’s Financial Times (FT), has entered this debate, even if in a tentative manner, in his Poynter Fellowship lecture at Yale (and in abridged form, in the FT yesterday)…
His focus was on whether the financial media should have been able to predict the global financial crisis. He acknowledges that financial journalism could have done better, though he does point out that the media was far from the only culprit (remember regulators?). He also mentions the fact that some noted FT journalists and a few others did offer ample warning.
Barber did mention that there has been a criticism “that the financial media was too too interested in building up a good news story than knocking it down”, and went on to cite Jon Stewart’s on-air demolition of Jim Cramer as an illustration that there is a case to answer. Such mention by Lionel Barber held promise…
But he then went on to identify what in his view are the “specific weaknesses in the financial media’s coverage of the events leading up to the financial crisis”. The issues of likely media capture, collusion or complicity (however ‘soft’ and ‘subtle’), as well as the problem of perverse incentives, are omitted from his list of weaknesses.
Instead he addressed the five other weaknesses regarding financial journalists. First, the failure to grasp the relevance of unregulated over-the-counter derivatives. Second, the failure to “understand the risks posed by the implicit state guarantees enjoyed by Fannie Mae and Freddie Mac…” Third, the failure “to grasp the significance of the growth in off-balance sheet financing by the banks.” Fourth, the slowness in grasping “that a crash in the banking system would have a profoundly damaging impact on the real economy.” And fifth, “the natural tendency to seek rationales for events as they unfold, rather than question whether they are sustainable.”
Given such a diagnosis of the weaknesses, it is not that surprising that in concluding, Barber answers his question of “how to do better?” by focusing on more training (which is “critical” in his view), emphasizing that the FT did a lot of training after the Enron scandal, with “regular and deeper lessons in areas such as reading balance sheets”. [To his and the FT credit, he also mentioned that the FT likes to host a variety of views in its op-ed and analysis pages].
It is understandably difficult for the editor of a major newspaper to acknowledge (beyond what he already did), let alone address head on, the likely role that a culture of collusion and quasi-capture may have played in the financial media — even if after all such media and many of its financial journalists went along with the messages fed by financial sector institutions and their leaders.
But even if we understand why there may be reticence to probe deeper, there is a problem of remaining silent on the roles that ‘culture’ and incentives may have played: it simply leads to the wrong diagnosis. Organizing more training on balance sheets or on complex derivatives may be generally useful. But it will not make a difference if such soft capture and incentive issues are not addressed.
Further, it is important to make a distinction (not explicit in Barber’s talk) between how much blame financial journalists should shoulder for not having seen the financial crisis coming, on the one hand, and whether they should have performed better once the onset of the crisis was apparent, on the other.
The answer to the first question is that it is the wrong question. Economists like to say that “it is very difficult to make predictions, particularly when they refer to the future”. This applies at least as much to the media and financial journalists. As an industry or a group, they cannot be expected to predict the future and foresee events. Blaming them for not foreseeing the crisis (or worse, for being the main culprit) is nonsense.
The second question is more relevant. As troubling events started to unfold, the financial media could have done much better over the past couple of years. They should have raised many more flags and warnings earlier on, and be more explicit about the risks as telltale signs were emerging. There were a few notable exceptions, including at the FT, but they tend to prove the rule. [As an extreme nefarious example, who can forget that Jim Cramer was publicly peddling Bear Sterns stocks as a real ‘buy’ when it was at 69 dollars a share, eleven days before its price had fallen to 2 dollars…].
In that regard, the financial media, however unwittingly, may have been one of the contributors to a crisis that is deeper, more protracted, and more costly than it may otherwise have been. Thus, the extreme interpretations should be rejected: the media was neither a passive bystander nor the main contributor to the crisis, but instead it may have been an abettor of sorts — one which did not help in mitigating the depth and cost of the crisis once underway.
In thinking ahead, the financial media will need to critically question convention more frequently, be less starry-eyed when interacting with financial sector leaders, and less gullible regarding “official” statements (and their data!). The financial media may want to engage more often in ‘think again’ practices, before final copy rush to meet a deadline, and may also be more prone to rely on expert feedback from uninterested and independent sources. The important issue of appropriate incentives will also need to be addressed. I will be writing further on this in the future.
In other words, there is a significant agenda ahead, beyond only focusing on the training of journalists.