Bill Doskoch: Media, BPS*, Film, Minutiae

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A senior Canadian business journo’s mea culpa

The Toronto Star’s David Olive admits he and his fellow business journalists weren’t skeptical enough about the forces driving the real estate and stock market booms that preceded the drastic economic collapse we’re currently enduring.

But I’m left without any sense as to how greater journalistic vigilance could have helped, except to encourage individual investors to start rowing to shore.

From the Toronto Star:

Financial journalism has too often been infected with the eternal optimism of those whose intimate acquaintanceship with money is presumed to give them special powers of intelligence.

Knowing this, I should have inquired into the causes of the latest booms. In the case of the panic-buying in U.S. housing, the cause was manufactured money in the form of subprime mortgages, collateralized debt obligations (CDOs) and other “toxic waste” that found its way onto the balance sheets of almost every major global bank and prestigious investment house. I should have been reporting, circa 2006, on the implications, and advising a shift to cash and cash equivalents, before the resulting, massive bank writeoffs of toxic-waste inflicted collateral damage on the stock market.

A standard measure of whether a stock is over- or undervalued is the multiple of the stock’s price to the earnings per share of the corporate issuer of the stock. In normal times, the 10-year average “price-earnings multiple” is about 16. At the peak of the latest stock-market bubble, the p/e ratio reached a ludicrous 30. Time to head for the hills.

There were some contrarian folks who sounded a warning that, sadly, went under-reported. Joseph Stiglitz, the Nobel economics laureate and former chief economist of the World Bank, was one of the bell-tollers earlier this decade. So was Yale economist Robert Shiller, author of Irrational Exuberance,who with similar prescience had warned of a grisly outcome at the height of the dot-com boom.

Jim Cramer of CNBC’s Mad Money has been taken to task by Jon Stewart in a YouTube moment for the ages. Cramer’s antics in shilling ill-fated stocks have been egregious.

But the far larger sin was the collective failure of the market regulators, their legislative overseers, and the business media. We should have sensed the trouble that was brewing, inquired into its causes and likely consequences, and directed investors to the lifeboats.

Read the whole column in its entirety, but Olive makes the point that most of the U.S. business media is centred in New York , as is most of the U.S. financial industry. There was precious little appetite to say anything that would hurt a major New York industry, especially in the wake of 9/11. Besides that, New York appeared to be losing ground to London for bragging rights as the world’s financial capital.

By 2006, the financial sector had come to account for 40 per cent of corporate profits, about double its normal share.

If Wall Street was scrambling to conceive new forms of derivatives and other gimmicks for conjuring wealth out of thin air, more power to it. All but a few doomsayers were content to accept this pixie dust as genuine, sustainable wealth.

And then let’s not forget the politics of the day:

David Frum, the short-tenured George W. Bush speechwriter, gave a quite astonishing — and credible — explanation for the widespread “see-no-evil” phenomenon on NBC-TV’s Meet the Press March 15.

“The [Bush] administration ….. had a problem through those years,” Frum said, “which was that there was not a lot of good economic news that affected the ordinary person. Incomes were flat, you could see the debt levels rising.

“There was one . . . story, however, that you could tell that was a positive story. And that was the increase in the assets held by the average family because of the housing bubble. And nobody wanted to get in the way of that. Not the administration, not the [then-GOP-controlled] Congress. Because if they did, what other good news would there be?”

Woe unto to the Bush-era regulator who did try to get in the way. The media have no similar excuse.

The problem, however, is that individual news voices aren’t that influential. Had some clear-eyed journalists warned of approaching financial calamity, why would they have had better luck than former U.S. Federal Reserve chair Alan Greenspan, who had also warned of “irrational exuberance” during the tech bubble days. I believe people continued to jump into the market after that warning — and got burned when that bubble ultimately popped.

A question Olive doesn’t wrestle with is whether individual investors were prepared to listen.

Some would have, but others would have only seen rising markets and said to themselves, “Yeah, whatever, you nattering nabob of negativism.”

However, journalism, like democracy, doesn’t guarantee an outcome. All we can do is give people solid information and our most honest analysis. After that, they have to make decisions.

For those who did come across dissenting voices but decided to stay at the stock market party too long, they will have to answer to themselves.

Mon, March 23 2009 » Main Page, Media