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Who warned us about the credit crunch?

Posted by Richard D North in Interrogating the Media / Media / Money on 13 December 2008

Why we posted this: Many people failed in the run-up to the current credit crunch and recession. Should journalists share some of the blame? Aren’t they supposed to know what’s going on and tell the rest of us?

The original stories:
Sub Prime – A crisis in journalism?
Paul Lashmar
The UK Press Gazette
18 July 2008

Predicting the Crash : an online debate
Ann Pettifor, Paul Lashmar,  Michale Blastland, Gillian Tett, chaired by Paul Mason
The Real News Network
7 November 2008

Summary of the stories:
Paul Lashmar has embarked on a rare project. He seeks to identify which journalists were any good at warning the pubic about the forthcoming credit crunch.

The answer seems to be that there was rather little warning, though Gillian Tett of the Financial Times in 2007 did write something useful and prescient. (Unease bubbling in today’s brave new financial world, FT, 18 January 2007).

The online debate was staged by the Frontline Club. Two of its participants thought the financial crisis was caused by irrational market exuberance and panic (Blastland), or by chronic regulatory and political failure (Pettifor).

There was little consensus about the role of journalism. Tett thought that journalists found the new financial instruments hard to research and analyse, not least because the people who knew the most (financiers) were too frightened to speak, and because the City firms’ PR was a barrage.

Besides, she believes that too much journalism is interested in glamorous subjects like Mergers and Acquisitions and this new stuff was obscure and complex.

Pettifor made the clearest opposite case. She thought journalists should have been looking around, and they would have seen plenty of economists who thought the problems were serious.

livingissues comment:
The debate was invaluable but its particpants were not often talking about the same thing. Tett was mostly discussing why journalists didn’t spot the problem in new financial instruments (such as Collaterlaised Debt Obligations) which had indeed been little discussed; whilst Pettifor was often talking about large international imbalances (which had been discussed quite a bit).

There were at least three main causes of the present crisis and the regulatory, professional and journalistic failures were a little different in each.

(1) The Sub Prime Mortage house price bubble
In the UK but especially in the US too many institutions lent too much money to too many poor people on too high a percentage of their homes which had acquired too much paper value. It only took a fall in house values or in earnings to make the whole edifice wobble and for bits to fall off.

(2) Banks with unknown debt problems
Many of the instruments by which debt – including the dodgy mortage debt (above) – had been packaged up and sold were little understood and it only emerged in 2007 and 2008 what huge numbers were involved. But the degree to which these instruments were liabilities was (and is) an unknown and when confidence suddenly disappeared it became easy to imagine them bringing banks down.

(3) International imbalance between debt and saving
For years, there has been discussion about the “irrational exuberance” of the world market. There was lots of discussion about the need to try to engineer a “soft landing” when the boom turned downwards. For years, too, there was discussion about the national debts of the UK and the USA and the surpluses of China and other “developing” countries.

Putting it all together….
Only the issues of the weakness of many mortgages (item 1) and (especially) the odd, new financial instruments (item 2) were seriously under-reported. And it turned out that the latter that really exploded. These two items were interlinked, as the housing “crash” made all the paper derived from mortgages dodgier.

Even then, it is not at all clear that the present situation could have been predicted. There is a view (put in the Frontline Club meeting) that the US authorities made a bad situation when they let Lehman Bros bank crash.

In short, it may be that this situation was not remotely inevitable and therefore predicting it would have been rather difficult. What’s more it is that difficult animal, a perfect storm in which several big problems knock into each other and create a wholly new phenomenon.

And then of course there is the difficulty of not known what is going to happen next. Some participants in the Frontline Club debate argue that alarmist journalism may be making a bad situation much worse. So it is genuinely unclear who much doom we want from our writers.

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