There is no doubt that – apart from some smart writers like Liam Halligan – not many people in the financial journalist profession saw the current crisis coming or predicted its full extent. Clive Davis, over at his blog, makes that point by linking to an article that goes into what is rather mysteriously called the “shadow banking” sector: ie, any institution that gets involved in trading in or holding credit, such as hedge fund. I wrote about misconceptions surrounding this issue the other day.
So why were financial journalists or many economists unaware of the gathering storms? Well, assuming that they were oblivious, my explanations are as follows. I’d be interested in the comments. Here goes:
First, over-specialisation in the economics profession. One of the great benefits to me in discovering those Austrian economists such as Ludwig von Mises and writers like Henry Hazlitt all those years ago as a callow youth was that it reintroduced me to the days when “political economy”, as it was known in the 19th Century, was not hung up on mathematical models or big, wooly macro-economic systems, but addressed the incentives, laws, and actions of man. I had the benefit of getting a good grounding in microeconomics, in understanding an economy as a dynamic process that changes through time, not a set of artificial “games” with nonsense such as models of “perfect competition”.
Second, I think that for many journalists who did learn economics, the sort of ideas that have given me and other classical liberals/libertarians some insight into the gathering storms are simply not on their intellectual radar, or if they are, they are led to believe that people with surnames such as Hayek, or von Mises, or Friedman, are somehow eccentric, even malevolent creatures. Most of them have either read their JK Galbraiths, or their Krugmans, and get their views from the still-powerful tradition of Keynesian economics. The idea that fiat, state-monopoly money and Big Government – the two are related issues – lie at the core of the issue just does not apply to a group of folk who generally tilt left in their politics (although this is far less the case than in other parts of journalism, in my experience).
Also, as a result of overspecialisation, a journalist who writes about, say, the government bond market may not always join the dots when it comes to information coming out in a different area of the economy. There is also the fact that as sectoral journalists covering their beats such as energy, retail, telecoms, etc, get involved in the day-to-day job of covering these things, that the broader trends get obscured because of the sheer volume of stuff that journalists deal with. Given how financial journalism has developed as a profession in the last two decades – I have some insight into this via my day job – I am not too sure how to deal with this. Part of the trouble may even be what I might call the “showbiz” trend in financial journalism: reporters at channels such as CNBC often talk about the market in a sort of sports-coverage way: who’s up, who’s down, etc.
There are reporters – the FT’s Gillian Tett springs to mind – who have been very good at trying to keep on top of how the credit markets have evolved and some of the risks associated with that. And there are commentators and investors such as Jim Rogers, for instance, who have been pretty astute at seeing the disaster and warning about it. But a lot of people, as Clive Davis says, have not been aware of the magnitude of what has hit us. Maybe, however, Mr Davis has to remember the flip-side of this coin: we may now be blind to the chances of a pretty rapid recovery, at least in some parts of the world.
Even if you don’t understand the finer gibberish of all the banking jargon, it must have been clear to a blind man that there was a massive property price bubble in the UK and many other countries.
The flipside of an asset price bubble is ALWAYS a credit bubble.
Bubbles ALWAYS burst.
Fred Harrison has been pointing this out for years, and called the 1989 and 2007 tops of the UK housing market years in advance. OK, his rememdy is one that is not palatable to many on this ‘blog, but the forecasting bit is easy.
Mark, many thanks for the Fred Harrison tip, I will look him up.
This governing class of ours is so shite.
I agree with Mark Wadsworth. That this was coming was plain to anyone who had the will to use their eyes (There are none so blind as those who will not see). It was just a question as when.
Unfortunately, it seems the strategy of many is, in the face of uncertainly, plough on regardless. Because it wasn’t clear if the bubble would burst in 3, 6 or 18 months (or more), people acted as if it wasn’t going to happen rather than to start mitigating the risks. As has been expressed on this and other boards many times, this is doubtless due to those taking the risks not being the same people who take the hit when the risk taking goes wrong.
A fine essay; you make some very good points.
One thing you touched on, which is one of my pet peeves (I have many!) is the 20th century attempt to turn economics into a “science”. Useful devices such as the “supply-demand curve” (or, more recently, the Laffer Curve) which were intended merely to illustrate a concept have been turned into complex mathematical formulae. No matter how elaborate your econometric model may be, it can never capture all of the variables of the real world (and, of course, is hostage to the quality of the input variables: “garbage-in, garbage-out”).
Economics is applied human psychology. It belongs in the Social Sciences department, not the math department. Unfortunately its practitioners desire the prestige which comes from its being seen as a “hard” science, so that isn’t likely to happen any time soon.
“Pretty rapid recover”. Not in Western Europe or USA…
I’ve been interested for a few years in the theory of socionomics promulgated by market technician Robert Prechter, which contends that all market action is driven by group psychology, which is itself endogenous i.e. market indexes are a measure of the psychological state of the participants, which in turn drives the news – and not the other way around.
This chimes with what you are saying about journalists’ intellectual radars somewhat, in that in times of growing optimism (and hence economic growth), they may well be much more willing to go along with any old explanation for the good times (i.e. whatever report has just been put out by the brokers) as long as it fits the mood and is half-plausible..
Mark Wadsworth – quite correct (of course).
Although not all bubbles are the same – and the can burst in different ways (the one in the United States is particularly perverse – and, ever worse, the malinvestments are not being liquidated).
J.P. is quite right about the collectivist education of most people in the media.
It starts at school (long before people go to university).
“But you survived it and so did I” (as a friend tells me).
That reminds of a Hammer Horror film scene.
A man who has been bitten by a vampire is raving and begging to be killed before he turns.
His friend does not wish to kill him and says to an old man who does.
“But I survived the Vampire’s bite”.
The old man sadly looks down at the raving victim they are dealing with.
It is enough – most people can not be expected to recover from the Vampire’s bite.
The attitudes and world view are there – even for pupils and students who spent most of the time looking out of the window.
It takes an effort of will to think “no I will research these things from first principles (indeed the first principles are the first things I will reason about) – I will assume nothing and seek out wildly different opinions”.
Of course for “good students” who absorbed and re-presented what they were taught and sought to take what they were taught to its logical conclusions……
Well, as Mises pointed out almost a century ago, it these good students who become the most extreme collectivists.
Beings whose minds are never crossed by doubt (at least not a form of doubt that will transform their actions) – driven by the need to serve the cause.
For example if, for the good of the cause, it is useful to pretend that President Lincoln was not religious and looked to “history” (rather than God) as a measure of right and wrong – then that is what one will do.
And one will go on the B.B.C.’s “Start the Week” show to discuss the matter with other people (all of whom will agree with what one says).
The Civil War cost more lives than all American’s other wars but it was justified as part of the historical process…….
The real Lincoln (rightly or wrongly) thought he was following the law of God – not the law of a secular history that “replaced God”.
Andrew Marr and the other good students had the (so called) heir to Lincoln in mind – and what sacrifices he might have to make in the cause of “history”.
In the cause of the new morality that replaced the old “nonhistorical” (whether religious or nonreligious) morality that holds that there is such a thing as right and wrong, good and evil.
Anything is justified if it serves “history” – that is what the good students (who go on to B.B.C. shows and so on) call “liberalism” (this is the word they used).
Of course it has another name.
“Normal paranoia Mr Marks”.
Very well – so I will just look at the specific point.
The size of hedge funds (based in evil tax havens) compared to the size of regulated things like AIG and (even more) Fannie Mae and Freddie Mac.
Which are bigger?
And which got the bailouts?
An “unbiased journalist” would be denouncing the existance of such things as the “quazi government” Fannie Mae and Freddie Mac, and would be denoucing the vast bailouts given to AIG and other financial operations.
Instead we get attacks on hedge funds and tax havens.
And the media question it not.
Actually, I beg to differ. Dozens, if not scores, of journalists and commentators saw this financial crisis coming a long time ago – some, as far back as the 1990s.
I myself, though essentially a political specialist, called the housing bubble top in July 2005, wrote about Goldman Sachs’ criminality in 2006 and described the credit crisis also in 2006-07.
The problem is not lack of predictions and analysis. It’s the over attention given to a handful of newspapers and news outlets manned by people who don’t know enough or aren’t willing to make the effort to connect the dots. Most of them are simply ignorant, but a handful are also in bed with the financial establishment.
There’s a two- tier system, where “brand” name newspapers count and no one else does even though it was the blogs and the alternative press which got the story right way ahead of the brands.
But when it comes to pontificating about what to do next, you wait, it will be the same hacks who didn’t see the train wreck they were in the thick of it..
Arrogance, monopoly, insularity, over-specialization – call it what you will.
The question is why people still go back to listen to these folks.
First I must stress, Lila Rajiva, that I am in no way attacking your work – I know nothing of your work and, therefore, I am in no position to judge it.
What I attack is the mainstream media (and the education system that produces it).
Here is yet another example – from this morning.
On the BBC radio show “Start the Week” a journalist was interviewed (the lady has a book out). The lady had “predicted the crises” (much in the way that “Newsweek” magazine produced a collectivist who had “predicted the crises”).
Did the “Financial Times” lady (interviewed on “Start the Week” denounce the expansion of the credit money supply by the Federal Reserve (and by the Bank of England and so on) N0.
Did the lady denounce specific features of the present boom bust – such as the Community Reinvestment Act and the more recent Afordable Housing Policy (from the politicians, such as Barney Frank and Chris Dodd, via Fannie Mae and Freddie Mac).
NO.
Did the lady even denouce the bailouts – such as the money that went to AIG (some of which, as you know, went to Goldmans).
NO.
The lady deounced the lack of concern shown by the bankers towards the “big picture” and the “wider society”.
“As I learnt during my Phd studies in what was Soviet Tajikstan……..”
To steal a line from Richard Littlejohn one “could not make it up”.
Of course the people on the Financial Times are not formal hardcore Marxists (although some of them at least used to be) and the lady herself was not a supporter of the Soviet Union (well she saw its negative aspects).
But they are vastly influenced by a collectivist world view.
As were the other people on Andrew Marr’s “Start the Week”.
The film maker who supported “the values of the Welfare State” against “the values of the last 30 years” (a time that has seen a big expansion of the Welfare State – but he was too ignorant to know that).
The writer who has just written a book on what a nice man Fred Engels was (the writer was against “Stalinism” but was full of nonsense such as that capitalism is about taking “surplus value” from workers – nonsense contradicted by no one on the radio show).
Or the film historian who pointed out that Marshall Plan propaganda films were full of pro Social Democrat Welfare State supporting themes.
No Andrew Marr and his chums are not party line Communists – but they (and the media generally) are far closer to that than they are to Samizdata people.
Fred Harrison’s insights and analysis challenge many conventional wisdoms. And, of course, he acquired his insights from earlier generations of some remarkable intellects. Those of you in the U.K. might want to take a look at the early campaign speeches made by Winston Churchill when he stood for Parliament as a member of the Liberal party. His analysis of land monopoly is as clear and hardhitting an attack on entrenched privilege as any by Henry George. Also, in the mid-1970s a largely unheralded economics professor at the Univ. of Wisconsin named Arthur Becker wrote a penetrating critique of what passed for supply-side economics. Look his paper up on Google; it is titled “Full Employment Without Inflation.”
“Land monopoly” – i.e. private ownership.
Like eugenics and railway nationalization (and so much else), it would not astonish me if the young Winston got involved in saying stuff that could be interpreted as supporting this stuff.
As for Henry George – for a refutation of his ideas see Murry Rothbard’s “Man, Economy and State” and “Power and Market”.
Of course the game goes back before Henry George (who was so horrifed by the rise in the price of land when large numbers of people came to settle in an area – much in the way a man would be horrified at getting wet having jumped in the sea).
James Mill, David Ricardo and so on all played the “free trade in land”, “anti monopoly in land” game.
Because they did not have the honesty to admit that they were filled with envy for people who inherited landed estates.
I work at Wicksteed Park – and Charles Wicksteed was one of these Liberals involved in the land nationalization movement (a more honest name than the Henry George “Single Tax” cover name).
Almost needless to say if land nationalization had come to pass the park would not exist (the government, local or national, would have sold it for “development” decades ago – I know of what I speak I am a member of the local council).
Charles Wicksteed himself started to have doubts when more “progressive” people in the land nationalization movement extended their ideas (naturally enough) to nationalizing factories as well.
There we are, some empirical stuff for those who will not accept the a priori stuff in Rothbard’s work.
Hi Paul Marks –
Well – there you’re quite correct.
Instead of focusing on specific cronyism/criminality, everyone is using the bailouts to go all over the place – attacking executive compensation in general etc.
It’s clear that there there was huge favoritism in awarding contracts and bailing out the banks – but what’s one to do about it? The players are too powerful.
I’ve written critically about AIG and Goldman and others…
The media, even the alternative media, will only publish so much of it, before dismissing it as conspiratorial..
Lila Rajiva