The Press and the Crisis

Lionel Barber of the Financial Times commented at length yesterday on the role of the financial press in allowing the present crisis to sneak up on us last year, arguing that

[i]n the final resort, there can be little debate that the financial media could have done a better job. In this spirit of self-criticism, I identify four weaknesses in the coverage.

First, financial journalists failed to grasp the significance of the failure to regulate over-the-counter derivatives that formed the bulk of counterparty risk in the explosion of credit following the dotcom bubble. Alan Greenspan was opposed to such regulation, but how many commentators took the former Fed chairman to task and warned of the risks? For the most part, journalists were too enamoured with the prevailing tide of deregulation.

Second, journalists, with a few notable exceptions, failed to understand the risks posed by the implicit state guarantees enjoyed by Fannie Mae and Freddie Mac, the mortgage finance giants. Here, we should tip our hats to the now much-maligned Mr Greenspan. He raised alarms early about the risks. Of course, it was hard for journalists to attack the ideal of broader home ownership in America, but that is no excuse.

Third, journalists failed to grasp the significance of the growth in off-balance sheet financing by the banks, its relationship with the pro-cyclical Basle II rules on capital ratios, and the overall concept of leverage. How many news organisations reported on the crucial Securities and Exchange Commission decision in 2004 to loosen its regulations on leverage? The explosive growth of structured investment vehicles at the height of the credit boom was also woefully under-reported.

Fourth, financial journalists were too slow to grasp that a crash in the banking system would have a profoundly damaging impact on the real economy. The same applies to regulators and economists. For too long, too many experts treated the financial sector and the wider economy as parallel universes. This was fundamentally wrong.

He also did not shy away from the idea that journalists were knowingly complicit -- that they often did understand what was happening, but remained silent for a variety of self-interested reasons.

I am convinced that this is all the more true in Canada, where there is really no competition in the business press; the Globe's ROB is really the only game in town, and its pages often seem more like an infomercial than bare-knuckles reporting.

There was a quip made recently that perhaps the Canadian Labor Congress should purchase the National Post (and thus the Financial Post) from the hapless Aspers. Here is the reason this just might be a solid idea. If nothing else, it would at least keep things more honest.