Wednesday, December 17, 2008

Not the media's fault on this one...

My friend Henry posted a link to a press release that suggests that 77% of people surveyed believed:

the US media is making the economic situation worse by projecting fear into people's minds. The majority of those surveyed feel that the financial press, by focusing on and embellishing negative news, is damaging consumer confidence and damping investment, making a difficult situation much worse.

Before I comment further, I urge readers to consider the following passage from a contribution from a Cato Unbound reader to this month's discussion about the financial crisis (footnotes excluded):

As the subprime crisis developed and appeared to recede — after the implosion of Countrywide, which had spun off IndyMac, which was seized by the Feds last summer — and after Bear fell into the trap — pundits began to argue what market would go next.

In this context, it seems important to note that IndyMac is said to have gone down in a classic bank run, albeit they held plenty of Alt-A mortgages, and that SEC chief Christopher Cox claimed a run on the hedge funds was what ultimately brought Bear down.

Many market watchers have claimed or have been given credit for “calling” the present crisis sometime this summer, but a creeping trust problem seems to have been corroding the undersides of market structures since Autumn 2007, permabears aside.

In retrospect this seems about the time loss of confidence began to spread from one market to another. For example, popular pundit Jim Jubak of MSN Money argued on January 18th that subprime would be dwarfed by issues with CDS. The recent Nobel Prize winner Paul Krugman likewise predicted that credit crunch difficulties in “obscure” markets would spill over to normal people in the regular economy in a comment about student loans on February 13th.

The specific implications of this for Wall Street investment banks’ MBS issues seemed to emerge last Spring. One example is an April 10th Financial Times blog posting in which commenters roast Goldman, predicting not just more write-downs, but suggesting insolvency — and wider troubles that would “eradicate book value across the financial system.” The Wall Street Journal also ran an article at the time.

The late, widely admired banking expert Tanta blogged a May 22nd Reuters report on CalculatedRisk, noting that defaults on certain vintages of subprime reached 37 percent, or “4 percentage points higher than previous estimates, S&P said.” She noted other figures showing prime defaults were also rising above expectations.

Recall that S&P had been rating these kinds of deals. It seems safe to assume that the extra 4 percent S&P hadn’t expected certainly wasn’t accounted for in the models made years ago, when its employees were already squirming as they force-rated deals.

In short, everyone called this crisis. It loomed openly over the public’s head like Hiroshige’s wave all summer as the MSM studied its navel to find yet more things to say about the psychological aspects of the Clinton-Obama relationship.

Business reporters and bloggers were sounding the alarm, but the election horse race appeared to keep MSM editors from promoting this story out of the back sections. If the press is a watchdog, does it have an obligation to our democracy beyond partisan election fever?

I am not going to claim any credit for calling this crisis because I had no idea it would be as significant as it has become. Based on my prior and current experience trying to work within these capital markets, problems were painfully evident going back to the summer of 2007. Even after Treasury Secretary Paulson said that the crisis was under control, conditions in the real estate markets were still deteriorating, both in terms of property values and financing availability. To this day, the public debt market (a $240 billion per quarter credit machine at its peak) is virtually shut down. The more I read on this situation and understand the drivers involved, the less and less this all becomes a mystery.

As such, I find it absurd that the same financial press who attempted to sound off the warning bells to the general public consumed by election year politics is somehow "projecting fear". I can understand if people are fearful about what is going but that has less to do with the media and more do to with the fact that the news is just plain awful. Blame for that should and does lie elsewhere.

As a minor matter, the same article has this rather odd tidbit:

Richard L. Scheff, a national expert on corporate liability and white collar crime issues, warns media that they could potentially be exposed to liability despite apparent constitutional protections:

"Although statements by the media are protected by the First Amendment, the survey results demonstrate that the public believes that the press bears some responsibility for the lack of confidence in the economy. One would hope that these media would act less out of self-interest in these times of national crisis. I could see creative lawyers attempting to pierce constitutional protections by constructing theories of liability for losses they may allege were driven by irresponsible news releases," said Mr. Scheff, vice chairman and partner with Philadelphia-based law firm Montgomery McCracken Walker & Rhoads.

I suppose what strikes me about the quote is that I have never seen or heard about anything of its kind where there has been a conflict between the First Amendment and corporate liability. Perhaps trained-legal minds know something I don't. As frivolous as it appears, I would think that such a legal challenge would fail miserably.