Johan van Rooyen - 23 March 2012

Why did the vast majority of journalists fail to see the financial crisis coming?

A great many factors contributed to the general failure among journalists to predict the financial crisis. This paper will examine them, coalesced along three broad strands. The premise of the first is that financial journalists were predisposed to fail because they are generally beat journalists. Within this context, I look at the consequences of embedded journalism, the extent of groupthink and the pernicious role played by the public relations industry. The second strand argues that financial journalists have moved away from some of the basic principles of general journalism and specifically looks at specialist training for financial journalists, the news industrys lack of conveying a comprehensive overview despite such warnings that were sounded by some journalists and economists, before closing with a case history of how things went wrong at the Banker. The last strand contemplates the role of journalism within the economic system itself. In the words of I.F. Stone, a journalist assigned to a particular beat soon finds himself a captive. (1963 5) Although Stone was talking about US State Department and Pentagon correspondents, he conveys the flavour of this captivity afforded by such hosts, including private off-the-record dinners by high officials and entertainment at service clubs. He points out that journalists tend to become absorbed by the areas they cover, taking on the prevalent habits, attitudes and even accents. Largely making the same point as Stone, but applied specifically to financial journalists, Danny Schechter uses the more modern term, arrived at from war reporting: embed (2009 19). He describes the seduction and co-optative nature of the affluence and elitism at the World Economic Forum summit at Davos where selected journalists, the chosen ones, were given full delegate status, the better to gush over their generous hosts. (19) Thus the more comfortably embedded a journalist is with their source, the more access they have to that source for stories. However, these stories are supplied to journalists on a quid pro quo basis: that they are published in a manner that is positive to the source (Dyck and Zyngales, cited in Tambini, 159). But it is not just that embedded financial

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journalists gain privileged access to publishable stories, they belong, as it were, to a wider, informal group of other equally favoured journalists. Groupthink is a psychological concept originally developed by Irving Janis; he describes it as the way people think when they are part of an in-group and their desire to conform with a consensus view prevents them from considering alternatives (1982 9). Media analysts David Edwards and David Cromwell explain how this phenomenon of perceived security and empowerment derived from belonging to a group can inhibit journalists from even mentioning risks that may result from their consensus view as it could be seen as an unforgivable attack on the group itself. (2011, 17) Matt Taibbi, a journalist for Rolling Stone who started writing about Wall Street after the crash in September 2008, describes the financial journalists who cover Wall Street as forming a closed and incestuous group who deliberately exclude the audience outside Wall Street in their coverage of Wall Street. (NPR Staff, 2010) But it is not just the journalists who are subject to groupthink, also those they are embedded with, the bankers and the financial experts, form very select groups such as the Davos men, the new masters of the universe, that Schechter observed and mingled with. (2009 19) Steve Schifferes, Professor of Financial Journalism at City University in London, says there was a kind of groupthink in favour of the efficiency of free markets which affected policy makers, economists and financial journalists alike (2011, 8). He quotes the Independent Evaluation Office report on the failure by the International Monetary Fund (IMF) to foresee the 2008 financial crisis as specifically identifying a high degree of groupthink as one of the causes of its failure to warn of the disaster that was to come. (2011, 9) If beat journalists are vulnerable to groupthink, then PR can free them from having to think at all. Damian Tambini paints what amounts to a chilling picture of the hold the financial public relations industry has over journalists. (2010, 167-169) He explains that journalists who need stories are beholden to PR practitioners for them, a fact which the PRs, who effectively control the flow of stories, know only too well. As such, they erect barriers to information and make it difficult for journalists to get to the bottom of stories, having to 2

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rely instead on an orchestrated flow of sanitised information. Tambini points out that financial journalists work under a lot of pressure because of the speed the news process has attained in recent times. Consequently there is less time to devote to editorial oversight, fact checking and ethical considerations. (165-166) Add to this, the complexity of the issues financial journalists report on (Doyle, 2006, 442 cited in Tambini, 2010, 159) and an environment exists in which, at least some, financial journalists become eager recipients of stories pushed to them by PR practitioners (Tambini, 2010, 168). Even the UK governments eventual forced involvement in keeping the finance system afloat was not immune to careful orchestration by PR consultants. Nicholas Jones, a BBC correspondent for 30 years, details how the government used timely, selected briefings to journalists at every crucial moment during the height of the Great Crash of 2008. While praising the personal integrity [the quotation marks are Joness] of the BBCs Business Editor, Robert Peston, he goes on to imply that because he had unlimited access to the broadcast platforms that mattered most to the government, Peston was used to fire-fight the turmoil in the markets with information leaked - in breach of Financial Services Authority (FSA) rules - by Downing Street and the Treasury with the aid of PR professionals (Jones, 2009, 67-68). Thus even Robert Peston, whose coverage of the financial crisis has been widely praised, cannot escape being tarnished as a result of his proximity to his sources. Let us now, though, examine the issues related to the failure of financial journalists to adhere to some of the more basic principles of general journalism. Matthew Fraser, former Editor-in-Chief of Canadas National Post, believes a lack of professional training in business makes financial journalists ill equipped to understand the complexities of city transactions (2009, 51-2). As a narrow point, it stands. But there is no evidence that better trained financial journalists would have been any better able to predict the crisis. Jane Fuller (2009), former Financial Editor of the Financial Times, and Robert Peston (2009) both suggest that journalists need to go back to basics in that they have been neglectful in their role of questioning authority and conventional wisdom (89 and 15). Tambini points out that, in the UK, public information 3

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available to journalists is much less than anywhere else in the world (2009, 170). Uncovering hidden information and challenging the official line are not skills taught on business courses but should be part of the training, on the job or at journalism school, of any competent journalist. One example of a journalist who does not have a business background but whose reporting has shed significant light on some of the main causes of the financial crisis is Gillian Tett of the Financial Times - she is an anthropologist by training and gained her Phd by studying goat herders. (Barber, 2009) Tambini alerts us to a very real recruitment and retention obstacle in that those who do have specialist training tend to want to work in the financial sector where they can earn much more money than by writing about it (2010 159). Professor John Tulloch, Head of the School of Journalism at the University of Lincoln, is critical of the call by Lionel Barber, Editor of the Financial Times, for more training as one possible remedy to future journalistic failures; suggesting that such calls amount to no more than lip service and knee-jerk reaction (Tulloch, 2009, 105-106). Economics commentators, like Martin Wolf of the Financial Times, were in a better position than beat journalists to see what was coming. Wolf describes the crisis as the clichd elephant in the room, but that everyone tended to look at just one bit of the animal. He describes how financial economists, international economists, central bankers, regulators and politicians all beheld their own areas and found things to be just fine. He admits that commentators, like himself, took these experts at their word. Then Wolf lists, by name this time, another impressive number of specialists who did warn of the dangers lurking in specific areas of the economy. Despite all the warnings, Wolf finally acknowledges, commentators failed to take a birds eye view. (2008) Howard Kurtz of the Washington Post, (cited in Barber, 2009) makes the same point that while there were incremental stories, the press did not convey a real sense of alarm until it was too late. Brian Caplen, Editor of the Banker, equally acknowledges that journalists were too focussed on events at the cost off ignoring the macroeconomics (2009, 30). Fuller slightly broadens the point by saying that it is not enough for journalists to just report, especially in the new age of instant publishing, they also have 4

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to analyse and comment (2009, 87). Another closely associated and important factor which could have helped to create the sense of alarm, Kurtz speaks of, is for editors to have given more prominence to the stories which did alert to flaws in the system (Schifferes, 2011, 11) and to have been more resistant in allowing the industry as much right to reply (Caplen, 2009, 31) as they did. In order to get an insight into the process, the mechanics and the extent the failure of financial press, we return to Caplen and the Banker. He admits to writing about the securitisation of mortgages back in the 1990s in such positive terms that they created quite a stir about the efficacy of the product. His private concerns about the potential risk involved with securitisation were soon forgotten as he moved on to the next innovation. (2009, 28-9) During the same period Caplen recorded the debate surrounding the ever expanding range of securitised debts and, once more, moved on, pausing neither to analyse nor to editorialise (2009, 28-9), over at the Financial Times, Gillian Tett was busily debunking the prevailing myth that dispersed risk made the consequences of defaulting less risky (Barber, 2009). Like Wolf, Caplen mentions some of those who had warned about various aspects that led to the crisis and goes on to say that what he believes fooled journalists most, was how large the speculative bubble had become in relation to the real economy (2009, 30). As we saw in the previous paragraph, Caplen believes this failure was due to financial journalists tendency to focus on events and banks and not on the macroeconomics which make for less interesting copy (2009, 30). Along the way, he also admits to inviting a rating agency to have its say in the interest of balance and fairness after publishing a single article analysing the methodology used in rating sub-prime securitisations (2009, 31). But while journalistic practice was at fault, we must also now examine the place occupied by journalism within the economics system. Joshua Clover, Professor of English Literature at University of California Davis, in a philosophical approach to the crisis, points out that dozens, perhaps hundreds of economists predicted a collapse in the housing market 5

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and the subsequent recession and suggests ideological blindness is the reason why so many warnings were ignored. He goes on to say that many more thinkers, not just economists, did explain the mechanics, the global context and the historical logic of the inevitable outcome of the financial expansion of the economy which started after the oil crisis in 1973 - but they are not counted amongst those who predicted the crisis of 2008 because they did not supply a date or felt the need to do so. Clover ends this line of thought with the observation that we are not interested in knowing who those capable of historical thought are, nor in what they are thinking. Instead, he writes, we are interested only in the thinking of stock pickers - those who can help us turn a quick profit. He criticises The Economist for not considering any other mode of thought and points out that the latter has evolved from being a hobby of speculators to becoming an entire episteme. (2011) The Pulitzer Prize-winning journalist, David Cay Johnston, makes exactly the same point - albeit from a more down-to-earth perspective - that smart financial journalists have been warning for a long time about the consequences of all the elements that led to the financial crisis, but that their message had been lost in favour of the groundless but more optimistic one purported by the financial engineers. (2009) Tulloch lays the underlying reason for the crash squarely at the door of capitalism itself (2009, 99-102). He cites Minsky to point out that capitalism is an inherently unstable system (1982: 86) and therefore it can only progress, and the financial system built on it can only be trusted, if there is amnesia (Tulloch, 2009, 99). Tulloch suggests that once all the forgetting has led us to the current crisis, amnesia went out of fashion with journalists and was replaced by a never-ending stream of recalling past financial disasters. But, he says, journalists are not looking at the past in order to subject the system to critique, but as a means of finding scapegoats and blaming individuals for what went wrong. (100-101) Peter Wilby, media columnist at the Guardian, states that business journalists are mostly fans of capitalism (2009, 85), while Tambini reports that many financial journalists in the UK simply do not see themselves in the role of institutional watchdogs (2010, 160). Tulloch reminds us that modern western journalism originated as a result of capitalist 6

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markets need for price sensitive information and concludes that financial journalism is an accomplice to the market and therefore, incapable of taking a critical stance, lacks the capacity to predict (103-4). Journalists are capable of seeing the next crisis coming, but only if they break away from the lure of the industry they write about they need, in other words, to write for the 99 percent. Until then, those thirsty for accurate, independent news about the financial system which impacts our daily lives will have to resort, not to the news industry, but to the mavericks and the lone voices on its margins.

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Bibliography

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