“Watching the watchdogs: on the role of financial journalism in the Financial Crisis”

 

José Carlos Matias[1]

 

Asia Media Summit

Session 2: Global Financial Meltdown – Where Can Media Help?

May 26, 2009

Macau

 

(The Financial Crisis is) “A financial system failure, a regulatory failure and a media failure. Everyone is willing to talk about the first two, but they are not willing to discuss the last one. We are all in this. It's a media failure of omission and commission.”

Danny Schechter

 

 

 

When the financial crisis burst out last September, the general public probably asked: how is it possible that the overwhelming majority of economists, pundits and analysts did not foresee what was looming ahead? Moreover, why the media did not tell the citizens what was going to happen? It may be unfair to put the question so starkly, but, in my point of view, to answer the question raised in this panel – “Global Financial Meltdown – Where Can Media Help?” – It is necessary to understand what went wrong.

The media undoubtedly cannot be blamed for the mismanagement of Fannie Mae, Freddie Mac or Lehman Brothers, or for the failure of the regulatory system, but it is important to do some “soul searching” in order to “heal” the wounds. 

Since the inception of the global financial crisis, journalists and scholars have been debating whether the media failed to warn the public about the wrongdoings of the financial institutions responsible for the crisis. On the one side, authors like Danny Schechter, argue that journalists were not up to the challenge of being an effective watchdog for citizens. On the other side, Chris Roush, Business Journalism professor at the University of North Carolina, sustains that before the current financial crisis, “business journalists shined a spotlight on serious problems in the U.S. economy”, but “regulators and members of the public didn’t pay much attention”[2].

Before looking into the role of the media before the commencement of the financial turmoil, we shall review some of the literature regarding the role of journalism vis-à-vis the powers, namely the economic power.

 

Journalism: power and legitimacy

 

The concept of journalism as the “fourth estate” was born in the 19^th century, in a time of the rise of political liberalism in Europe and the US. However, the term was coined earlier, in the 18^th century, by the British political philosopher Edmund Burke. As quoted in the book Heroes and Hero Worship in History (1841), by Thomas Carlyle, “Burke said that there were three Estates in Parliament, but in the Reporters Gallery yonder, there sat a Fourth Estate more important far than they all.” Fourth estate refers, thus, to the press. Later with the advent of radio and television, it became a buzzword related to the media (as information media). The expression was widely used as a way of legitimizing the burgeoning presence of the journalist in the public sphere.  Normally, the term “fourth estate” is associated with the theory of the three powers of Montesquieu, the French philosopher who argued for the separation of the three public powers: legislative, executive and judicial[3]. This assumption rather than legitimizing journalism as an “estate”, can be counterproductive as no citizen has ever elected the media to be part of the system of checks and balances. “Who elected you?” asked Spiro Agnew in a famous speech in Des Moines, US, addressing the journalists that were criticizing Richard Nixon’s policy towards Vietnam. Daniel Cornu looks at the issue of legitimacy of journalists in relation to the discussion on the accuracy of the information and on the way that information truly reflects the real concerns of the society[4]. In the eyes of André Fontaine the expression “fourth estate” should be replaced by “feudal power”, as several lobbies make use of the media as a means of voicing out their concerns and interests. In addition, Fontaine challenges the concept because, rather than being a power, journalism is shaped and controlled by the other powers, id est, the decision centers of the economic, political, technological and military powers. Fontaine’s perspective overlooks the role that the journalists can have as a propeller of social change. In fact, during the 20^th century, journalism was regarded quite often as the watchdog of the citizens against the abuses of power of the institutions[5]. Indeed, there are several examples of how journalism unveiled stories that ashamed the governments as the Watergate, in the US, or the Rainbow Warrior, in France. Conversely, there are several other cases of manipulation, complete lack of accuracy or even fake stories, such as Janet Cooke’s Pulitzer winner report about an eight-year-old heroin addict, in 1981. Other cases of manipulation as the reports on the Romanian Revolution (1989) and the Gulf War (1991) prompted a wave of stark criticism on the “decadence” of the “fourth estate”. Since mid 1990s, with the increasing movement towards concentration of media groups – with large-scale mergers and acquisitions – the rise of 24-hour cable news networks and the internet revolution, journalists faced new challenges. Cornu outlines six main problems dealt with by journalists in this context: the decline of the autonomy of journalists in relation to several powers; less efficient and weaker methods of checking the accuracy of the information; infotainment, id est the contamination of information by the entertainment logic; invasion of privacy and intimacy spheres of the citizens; the increasing power of the public relations offices of institutions over the journalists; and acquiescence of editors and other media agents in face of the interests of the media organizations - in other words the conflict between the values of journalism and the entrepreneurial logic. 

 

On being a financial journalist

 

These facts have to be dealt with by all journalists, but those who work in the financial media or in the economy and finance sections of major quality papers face deeper challenges, as they bear a special social and economic responsibility. This perception is reinforced by the wave of criticism on the role of financial journalism just before the current economic turmoil.

In addition, financial journalism has to deal with facts and systems that are indeed overly complex. Over time the structure of the financial system became not only more complex but – in spite of being more open and with more information – in some cases somehow opaque – as it has been shown by the hedge funds and derivates. Moreover, the process of globalization of the markets brought to the system a great deal of interdependence and web-like interplay between actors and products across the borders. Financial journalism is also challenged by the new media, through blogs, websites and forums. As Charlie Beckett underscores, “They provide information sources that simply did not exist before. But they also change the terms of journalistic trade”[6].

Nevertheless, journalists do have a specific range of privileges that are not shared by other actors in the public space, as bloggers or netizens, such as access to sources, protection of sources and some immunities regarding defamation and privacy if they are clearly following the “public interest”. For a financial journalist, those privileges are attached to responsibilities- not only the general responsibilities related to the codes of law, ethics or to pursue key values as accuracy or fairness, but also specifically in terms of market abuse and conflict of interest[7].

Danny Schechter is among the harshest critics of the role of the financial media in 2007 and 2008. In his book Plunder, an investigation on the Subprime Scandal, published just one week before Lehman Brothers sank, he outlines two major failures of the financial journalism. On the one hand, the journalists did very little in examining the new mysterious financial products - as the structured investment vehicles (SIV). On the other hand, they did not pay sufficient attention to the warnings of the community associations about the shameless lending activities in some of the poorest areas of the US.

 

Failures and shortcomings

Why did this happen? There is not a single or linear explanation for this. The absence of sufficient attention to what was really behind those exotic products and the negligence over the predatory attitudes of lenders can be understood only when the interplay of several factors is taken into account. Normally the financial media focuses mostly on the exchange and equity markets. The rise of the derivative and debt markets did not receive much attention. The journalists who delved into that were surprised by the opaque nature of such world. In Tambini’s report, BBC Business Editor Robert Peston explains a curious situation:  “For many months, I was very concerned about the explosive growth of CDOs (Collateralized Debt Obligations) and I tried to explain them through my reporting. Doing so was a challenge, when even bankers creating the CDOs were unable to describe them in terms that make sense to nonspecialists”[8].

Lionel Barber, editor of the Financial Times, concurs with this remark. As the derivatives markets seemed so opaque, it was very difficult to bring the issue to the headlines, as it was much more clear-cut to highlight stories on public earnings, for example[9].There is also a sort of psychological dimension in the financial news euphoric celebration of the “sky is the limit”, in a time of sunny days for the financial markets. From 2003 to 2007, the financial editors were much more interested in bringing the good news to the front pages.

As Barber says:

 

“Most reporters working in this so-called “shadow banking system” found it hard to interest their superiors who controlled space and who were more interested in broadcasting the “good news” story of rising property prices and economic growth”[10].

 

In times of euphoria, the editors and the public tend to be reluctant in listening to “prophets of doom”. This happened for example in 1986, when the Harvard economist John K. Galbraith was invited to write an article for the New York Times on the  speculation in the US financial markets. His piece was not published because the editors deemed Galbraith’s article “too alarmist”. The fact is that his text foresaw the financial crash of October 1987. In 2006, the investigative journalist Danny Schechter did publish an article in Niemans Reports, a journalism review, calling for a greater scrutiny on the derivatives market and on the credit and debt markets. Soon, Schechter was ridiculed by some reviewers as an “alarmist”, or a “doom and gloomer”.

Perhaps what happened was similar to what the German political scientist Elisabeth Noelle-Neumann described as the Spiral of Silence. According to this perspective, people tend to be silent if they feel that their opinion is not shared by the majority. Noelle-Neumann presumes that people are afraid of being socially isolated because of their opinions[11]. Surely, this concept was built to explain the dynamics of public opinion. But not only most of the columnists in the newspapers, but also the overwhelming majority of economists did not anticipate what was going to happen or, at least, warn about the problems that could be caused by the credit and debt model. The New York University economics professor Nouriel Roubini is the most notable exception. So we can ask, as Charlie Beckett does, 

 

“How can you expect journalists to be so brave, independent, fearless and intelligent when most of the people running our banks and treasuries appear to have ignored the warnings as well?”[12]

 

The journalists may not suppose to be soothsayers, but their role is different from “most of the people running our banks and treasuries”. After the beginning of the financial turmoil, in September 2008, several editors and senior journalists began a process of self criticism. Lionel Barber’s speech before an audience in the University of Yale sums up the lucid spirit of a responsible editor. He outlines four major failures of the financial media: they did not grasp the impact of the quasi absence of regulation in the financial markets, namely the debt and derivative products; they failed to perceive the risks of the state guarantees given to Freddie Mac and Fanny Mae; they did not understand the problems related to the growth in off-balance sheet financing by the banks; and “financial journalists were too slow to grasp that a crash in the banking system would have a profoundly damaging impact on the real economy”[13].

There are other factors that are noteworthy. Schechter looks into the relation between the newspapers and the advertisement from banks, real estate agencies or credit card companies.

 

“One of the key sources of revenue for newspapers is real-estate advertising in weekend supplements and classified sections. The newspaper industry became, in some communities, the marketing arm of the real-estate industry”[14].

 

It is not easy to access to what extend this argument had direct or indirect influence on the stories published. It is likely that this was the case especially in medium size newspapers. At a macro-scale, the “Washington Consensus” and the deep belief in the self regulation of the markets also played a role. This narrative was promoted by most of the economists, analysts, bankers and high ranking officials in governments quoted in the mainstream media and quality papers. The god-like figure of this dogma was Alan Greenspan, the president of the US Federal Reserve. To some extent, financial journalists may have been blinded by the “self-evident” free market perspective and forgot to explore counter-narratives. Schechter also points out that business media has been promoting the “cult of the masters of universe”, the moguls and the legendary financiers. This caused a kind of “cultural embedding” because when financial journalists cover business, “they become part of the scene”.

 

“They ignored us”

 

Schechter portrays a bleak picture of the role of the financial journalism in the context of the international crisis. His remarks are indeed incisive, but some elements are overlooked. The constraints on the work of journalists also shaped the failures in being up to the challenge. As the financial systems became more complex, the time to produce the news, stories and features shrank. Journalists had to deal with the newly built army of PR officers who emerged as a stronger gatekeeper in the process of news making. The growing competition from the new media and cable news networks also played a role in squeezing the time and resources for the longer tasks as deep and accurate investigative journalism. In a research on the role of financial journalism in the Enron scandal, Gilian Doyle concludes that

 

“The huge investment of energy and uncertain outcome associated with investigative reporting means that, for most financial media in the UK at least, this is supported only on an occasional basis rather than as a routine activity. So long as this remains the case, the opportunities for media to play a role in uncovering frauds such as Enron will be limited”[15].

 

As a response to the wave of criticism on the attitude of journalists before the crisis, Chris Roush argues that the main problem had been the lack of attention given to what had been published[16]. He outlines a list of articles on quality papers as the Wall Street Journal, Washington Post, New York Times or Fortune, questioning the government backing and the practices of Fannie Mae and Freddie Mac, the mortgage market or the lack of regulation in Wall Street. In fact, as Fortune economist Allan Sloan asserts, “The fact that housing was a bubble was printed millions of times”[17]. So why the people did not pay sufficient attention? “It is very hard to get the public's attention for stories warning of complex financial risks in the middle of a roaring, populist bull market”, says the Washington Post executive editor Marcus Brauchli[18].

 

Conclusion

 

Unquestionably, there were stories on what was really happening. Thus it is not fair to turn the financial journalists into the scapegoats of the current crisis. However it seems also quite clear that the major quality newspapers – not to mention the popular mass media – failed to bring the articles that questioned the credit bonanza to the top of the agenda. As this is not only a matter of substance, but also of perception, the global meltdown represents a rare challenge for the role of journalism and especially financial journalism. Recent data show that in some cases the sales increased as the citizens are eager to find in those papers the explanation for what is affecting so much their lives. In other cases, the financial crisis is threatening the existence of quality newspapers. 

The best the media can do, in order to have a positive role in the context of the global meltdown, is to go back to basic values of independence, accuracy and balanced approach to matters of public interest. As we learned in our early days in this field, the news media cannot neglect the counter narratives and the difficult questions. The way out of this crisis has been paved by the internal and public debate among journalists and scholars. In the recent past, after the 1997 Asian financial crisis, the Enron scandal or the dot.com bubble, the same type of discussion took place. Perhaps some of the structural problems remained; others emerged. Whether we look at journalism as the Fourth Estate or a watchdog, more important is the role the citizens bestow the journalists. They (We) are, as Jean Daniel said, in the intersection of Power and History[19].