A Tale of Two Financial Stories, or Why it Helps to Pay Attention to the Man Behind The Curtain — Paul Krugman and NPR edition
Two stories caught ear and eye this morning.
Very short form: the NPR story, of a type that I generally regard with a bit of suspicion, was an anchor-interviewer with a reporter doing a prospective analysis of the big financial rumble to come between, Goldman Sachs and Sen. Carl Levin’s subcommittee. The story hinged on the release of emails by both sides intended to condemn or exculpate the poster child for a financial system gone way off the tracks.
It was everything you’ve come to loathe in political horse race stories, now translated into the big-money arena: who’s ahead, who will win, what each is saying of the other.
There was no real attempt to make sense of the underlying argument, and in fact the reporter conflated two different issues: whether Goldman defrauded investors by failing to reveal flaws it knew and or consciously engineered into financial instruments it was selling; and/or whther Goldman in some sense conspired to bring the economy down by shorting mortgage backed securities in the run-up to the collapse of 2008.
The difference matters, to put it mildly.
Meanwhile, Krugman makes the obvious point: short sales may be ugly but they are not in themselves evil.** FWIW I’m not bothered by shorts at all (except on English men of a certain age, but that’s a different story, and probably relates to the trauma of being forced to wear and observe type-specimens of such schmattas as a very knobby kneed and self-conscious third grader in Hong Kong back when blogging was done with chisel and slate).
Rather, as Krugman argues, the real story revealed in straying emails is not that of Goldman doing what Goldman is set up to do — make as much money as it can, by any means up to the limit of the law (they devoutly hope, while budgeting for that hope’s denial) — but of rating agencies doing exactly what they are set up to prevent. Krugman writes:
The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.” Clearly, the rating agencies skewed their assessments to please their clients.
These skewed assessments, in turn, helped the financial system take on far more risk than it could safely handle. Paul McCulley of Pimco, the bond investor (who coined the term “shadow banks” for the unregulated institutions at the heart of the crisis), recently described it this way: “explosive growth of shadow banking was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out fake IDs.”
Goldman is a pit bull, trained up as an attack dog. You expect it to bite, especially, as now, when that hound’s master has for so long failed to constrain its pet.
The response is obvious, and is now, imperfectly, working its way through the Senate.
The ratings agencies are supposed to be neutral umpires, but the payment structure under which they work has turned them, as Krugman notes, into witting confederates of the very folks whose offerings they were supposed to assess. The term “accelerant” is often used to describe the chemical compounds arsonists to transform a match-drop ignition into a holocaust. It works pretty well to describe what happened to our financial house when the ratings folks used their magical “AAA” rating to transform sh*t into (fools’) gold.
All of this is to say read the whole Krugman piece, for one, and to ask the DeLong question of NPR: why oh why can’t we have a better press corps.
What’s really troubling to me is that NPR is in fact one of the good ones, by and large. They have smart people working for them; they still employ real reporters; they pay attention.
But economics reporting is very hard — I’ve said elsewhere that I think it is harder than what most people think of as “real” science writing — and the way NPR swung and missed this morning is a very useful example of what happens when a news organization doesn’t quite get the story or the beat.
The piece I reference isn’t altogether terrible, in the sense that it sets out to deceive or is talking about something wholly trivial in the face of a larger disaster (see Michelle Obama, sleeveless dresses of, for an example of what I mean here). I don’t know the internal editorial sequence of events that NPR stories go through in this or in any case, but if I were to guess, I’d say that at least part of the problem behind this kind of story on that network is that the assigning or managing editors for the show are not sufficiently knowledgeable to tell the difference between the tabloid excitement of Goldman in the headlines and the substantive significance of something much duller, like whether or not Moody’s and Standard and Poor assessed risk accurately.
Just writing those last three words made my eyelids dip, just a little — which is the problem. You have to see the story behind the facts if you want to be a useful journalist. To be sure, a big part of the job of any specialized journalist, a science writer, an econ scribe, whatever, is to educate your editors into a broad understanding of what really matters on your beat, so I don’t want to absolve the on-air folks entirely.
Also, to be fair, we all like the tabloid stuff to help the morning coffee go down; it’s part of the trade too. But my beef is that NPR had two stories on the financial crisis in today’s Morning Edition program — the other was on the way Senate filibuster rules are impeding reform — and both missed the story with more significance to the question of how bad and how soon the next crisis will be. And that’s not good enough.
*Within which I also found today, to my far-from-solitary surprise, a pointer to Mark Helprin making sense.
**For a good explanation of one of the garden variety uses of short selling for ordinary investers, or more precisely, the writing of put options, see Burton Malkiel’s passage on the use of options in his occasionally controversial classic, A Random Walk Down Wall Street.
Image: Jean-Marc Nattier, “Marie Zéphirine de France” c.1753Decline and Fall, Economic follies, economics, journalism, Journalism and its discontents, radio, Uncategorized
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