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Justin Fox

We have just been through the worst financial crisis in seventy years, in the midst of a media transformation of a magnitude not seen since . . . take your pick:

a) the advent of radio and TV;

b) the advent of the telegraph; or

c) the advent of the newspaper.

The pairing of financial craziness and media innovation has a long history. The famous precursor of modern financial bubbles—the tulip-bulb-futures mania in the Netherlands in the 1630s—came on the heels of the founding of the first Dutch newspapers. Communications breakthroughs from the telegraph through the Internet have played a part in numerous manias and panics since.

But the evolution of the media and their role in the recent crisis is more complicated. It is a tale in which technological innovation, imploding business models, and intellectual fashion are all intertwined. And it is a story of two different journalistic genres: the public-interest variety that the profession prides itself on but that has lost its main source of funding (and that never focused much on the economy anyway), and the financial reporting that remains a solid business proposition but tends to echo the very flaws of the financial and economic system that we might want it to expose.

The first and most obvious element to this story is innovation. Opening the Internet to public use in the 1990s enabled an explosion of new ways to create and transmit information and entertainment (more on that in a moment). However, the most immediate result has been an epic challenge to the business models of traditional media companies.

Among the hardest hit have been the metropolitan daily newspapers, some of which had over the past half-century become monopoly providers of printed information—not just news but classified ads, supermarket circulars, movie listings, sports scores, and so on—for their circulation areas. That monopoly status brought staggeringly large profits.

At some newspapers (The Miami Herald and The Boston Globe, for example), part of that gusher of money was diverted to subsidize public-interest journalism, by which I mean investigative reporting and editorial crusades aimed more at doing good (and winning prizes) than making money or even luring readers. Newspapers were by far the leading source of such journalism. At the local and regional levels they were often the only source.

Then, a decade ago, the metro dailies’ monopoly began to unravel as the likes of Craigslist, ESPN.com, and even newspapers’ own websites pulled readers away from the money-spinning print product. The profit had been in the full package—not so much in what readers paid to get it (subscription fees usually did not cover the cost of printing and distribution) but in what advertisers were willing to pay to reach those readers. As readers began to access what they needed cafeteria-style on the Web, and advertisers followed, newspaper profits began a dramatic fall. A side effect of this implosion—which is far from over—is that public-interest journalism has lost its main sugar daddy.

That is an alarming development for many reasons, and the search for new funding models to support public-interest journalism should be a national priority. But it is not clear that it had much impact on the trajectory of the financial crisis, for the simple reason that the public-interest journalism done by newspapers only occasionally focused on economic matters and almost never on the financial sector. Of the ninety-four Pulitzer Prizes for public-service and investigative reporting awarded since 1918 (a fair proxy for public-interest journalism), only five can reasonably be described as honoring economic reporting.

This lack of interest in economic or financial matters had not always been the rule. The pioneers of American investigative journalism, the muckrakers of the early twentieth century, focused almost exclusively on the misdeeds and power of business. After the advent of big government in the 1930s, though, public officials became the main target of reporters’ zeal. In some ways it was similar to the academic null hypothesis that David Moss describes elsewhere in this volume: government had become the biggest player on the field, so it was the obvious target of investigation. There were also ideological factors at work. Newspaper owners tended to be right-leaning small businessmen with a suspicion of government, and while most of the journalists they hired leaned left, both groups could agree that corrupt politicians were a valid target of investigative zeal. Finally, and most important—especially as newspapers drifted from local ownership into the hands of a few big national chains—newspapers owed their profits to advertising, not circulation revenue. That meant tough reporting on the business community (a.k.a. the advertisers) generally was not a wise choice. Running a negative story about one car dealer was okay; writing a negative story about car dealers as a group, however, was economic suicide.

The early muckrakers wrote for national magazines that were just beginning to build mass readerships. Once advertisers followed, the magazines be-came far less interested in such work.¹ It is possible that new, nonadvertising forms of funding for investigative journalism could bring back old-style muckraking economic journalism; but we do not know that yet.

There is, however, an entire branch of journalism devoted to covering business and financial markets. It, too, has been going through a shake-up over the past decade thanks to both the direct effects of the Internet boom and the indirect distortions caused by the dot-com boom and bust. (Business publications and broadcasters were spectacularly and unsustainably profitable from about 1997 through 2000, leading to a pretty harsh hangover afterward.) Still, there is vastly more business and financial journalism being produced today than twenty years ago. There seems to be no danger that it will shrivel up and die, largely because readers have proved willing to pay for it (at least a little).

But the market-driven nature of financial journalism means that its practitioners find it hard to go against the flow. The best way to understand this predicament is probably through the models that economists use to describe why smart, against-the-flow investment managers find it so hard to take on financial bubbles. It is exactly when markets are most off-kilter that professional investors betting on a return to sanity come under the most pressure from their investors and lenders.² As a result, those in the investment business have found that it is far safer to fail conventionally than to succeed unconventionally, as investor and economist John Maynard Keynes put it in 1936.³

The pressures are not quite so great in journalism. A writer can rail against prevailing market wisdom for decades on end, as Alan Abelson has done in the pages of ���������Dz�’s since the 1980s, and remain gainfully employed. The business media as a whole, however, will never defy market sentiment for long. It just isn’t good business. Now, after the crash, financial reporters are in a tough and skeptical mood—because consumers of financial information are in the same mood. But when good times return, it is unlikely that more than a small minority of financial journalists will be interested in vigorously challenging the status quo. And again, they probably ����dzܱ����’t be, because it wouldn’t serve their customers.

The same goes for professors at business schools, which are very market-driven institutions, and to a lesser extent for non-business-school academic economists. Philosophy professors, historians, sociologists, and cultural critics of other sorts are a different matter, and it was easy enough to find members of these groups railing against the supremacy of the market in the 1990s and early 2000s.⁴ But what financial reporter is going to listen to them?

In the years leading up to the financial crisis that began in 2007, the financial media did publish and broadcast numerous warnings about potential problems, especially those involving the overheated housing market. Yet there was no concerted effort to warn that the entire financial system might be about to come crashing down. How could there have been, when the vast majority of experts—at business schools, at the Federal Reserve, on Wall Street—did not think a crash was on the way?

The nonfinancial media played a different role, with cable TV in particular doing all it could to spread the housing contagion. Just think of HGTV and its shows Designed to Sell and My House Is Worth What? or the endless advertising from the likes of mortgage lender Ditech and no-money-down guru Carleton Sheets.

The dramatically lower entry barriers for publishing online allowed some academic experts and market veterans with non-consensus views to share their opinions and knowledge, although for the most part the Cassandras of the blogosphere did not attract large audiences until after things had obviously begun to go wrong.

Once that happened, starting in mid-2007 but especially after January 2008, the financial media were fixated on the story, but in most cases with very little understanding of how everything fit together. That is partly because most financial reporters and editors are stock-market obsessed and do not really understand debt markets—and this was a debt-market crisis. It is also because it is hard to shift gears from good times to trouble. But mainly it was that the interconnections between mortgage loans in Phoenix, banks in Germany, good times in Iceland, and big bonuses on Wall Street were not adequately understood by anyone.

During the full-on panic of Fall 2008, the increasingly real-time nature of news reporting may have added to the distrust and desperation. Coverage was breathless, incomplete, and error-filled. Cutbacks at established news organizations probably exacerbated this problem. But the panic did end. Markets partly recovered. What’s more, hoping that news coverage will become less real-time in the future seems like a pipe dream.

So where does that leave us? Partly with a realization that we can never rely on the media to prevent financial crises, but also with a few hopeful thoughts. Business journalism is not going away. The Wall Street Journal and Financial Times remain viable enterprises, and The New York Times keeps expanding its business coverage. CNBC is a profit machine. Public radio has become an important source of economic news with Marketplace and Planet Money. Several online business-news start-ups have survived and appear to be thriving. Thomson Reuters and Bloomberg, two companies that make big profits selling data to investors, have been investing much of that money in journalism, and are showing an increasing willingness to subsidize investigative reporting.

Also, for the next decade or two at least, business journalism’s ranks will be filled with grizzled veterans of the 2007–2008 crisis who might exercise a moderating influence on the financial sector’s tendency toward bubbles.

Finally, it is possible that new forms of media will allow room for more diversity of opinion and approach—a diversity that is the opposite of the groupthink that brings on financial crises. This hope may be a pipe dream, too: in the political sphere, for example, blogs have tended to segment themselves and their audiences by ideology.⁵ But it is my experience that in the economics and financial blogosphere, as well as on Twitter, people with differing viewpoints about financial markets still engage each other on a fairly regular basis. Their online battles may save us yet.

ENDNOTES

1. See Alexander Dyck, David Moss, and Luigi Zingales, “Media Versus Special Interests,” NBER Working Paper No. 14360 (National Bureau of Economic Research, September 2008).

2. The seminal paper on this topic is Andrei Shleifer and Robert Vishny, “The Limits of Arbitrage,” Journal of Finance (March 1997).

3. John Maynard Keynes, The General Theory of Employment, Interest and Money (London: MacMillan, 1936), 141.

4. For example, Robert Brenner, The Boom and the Bubble: The U.S. in the World Economy (London: Verso, 2002); and Doug Henwood, Wall Street: How It Works and for Whom (London: Verso, 1997).

5. For example, Eric Lawrence, John Sides, and Henry Farrell, “Self-Segregation or Deliberation? Blog Readership, Participation, and Polarization in American Politics,” Perspectives on Politics 8 (1) (2010).