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Jeff Madrick

What is the business media about? What is it for? Is its purpose to serve the investment banks and the Fortune 500—business in general—or is its purpose to serve a public of some kind? Is it an investing public, only a business public, that it should serve, or is its purpose to be a watchdog for all?

I have a long history in business journalism. Times changed considerably during the 1970s, as did interest in business news. To take but one example, Money magazine, for which I worked, launched in the early part of that decade. Or another, The New York Times, which up to that point did not have a regular financial section, began to include one at some point in the 1970s.

I believe, however romantic it may sound, that the press has a very special place in America and that its role here is different from its role in other democracies around the world because we have a somewhat different history. We did not have a class-based fight for democracy in America, and we do not today have natural warring factions along class lines that determine our political outcomes. Europe had a class-based revolution on its way to democracy and still thinks and operates politically in those terms. The two classes tend to check and balance each other. We do not have similar checks in the United States, and so I look at the press in America as having the role of watchdog over democracy and over the accrual of power—not just economic power, but government power, educational power, and so forth. Is the business media good at meeting these objectives? I don’t think so.

By and large, the business media goes with the flow; it supports current conventional wisdom, which all too often reflects the current power structure. When the prevailing power structure once believed in the uses of government and acknowledged that markets often (yet not always) fail, the press largely backed that notion. When it shifted to an anti-government attitude and a sense that unfettered markets are almost always efficient, the press for the most part shifted with it.

The defense of reporters is always that they are only as good as their sources. People were not knocking down the doors in 2003, 2004, and 2005 to tell reporters about the risk of securitization and mortgage-backed securities. To be fair, I think some people were knocking on the doors about the subprime excesses, but few in the press heard the knocks. I think most people now agree that we misrated As, AAs, and AAAs. They were paying far higher interest rates than plain vanilla corporate bond AAAs.

Most on Wall Street were looking the other way as well. But not all. Some were raising red flags, but Wall Street firms are now very media savvy. In the 1970s, one extremely charming Southern woman handled all of Morgan Stanley’s public relations; I think she had one assistant. But in 2000, when a young former banker at Fortune magazine uncovered the truth about Enron —with the help of research from a short seller—Enron came beating down the doors of Fortune editors. If the reports I read were correct, Enron went right to the managing editor or editor of Fortune to try to get it stopped. To the editors’ credit, they did not stop the story. So there were victories.

One of the most telling signs of the press acquiescence was a New York Times editorial on the day in 1998 when Travelers and Citicorp announced their planned merger: “In one stroke, [they] will have temporarily demolished the increasingly unnecessary walls built during the Depression. . . . The fact is that Citigroup threatens no one because it would not dominate banking, securities, insurance or any other financial market.” But the editorial, rather prescient it turns out, went on: “A collapse in the company’s securities and insurance operations could drag down its commercial bank. But that will happen only if Federal regulators fall sound asleep.”¹

Can we know when a crisis is coming? No. But that is not the issue. It is not a matter of knowing that there is a crisis; it is a matter of questioning extremes. Why price earnings multiples, on average, are 45 for a sector in 1999, for example, when it is very hard to imagine that earnings growth could be high enough to justify the price with the GDP growing at 3 or 4 percent a year. Earnings growth cannot outpace GDP growth by a wide margin indefinitely. That is the kind of information that could be reported. One does not have to make a full analysis of the nature of the crisis.

And there were Wall Street warnings well beforehand about the credit crisis of 2008 and 2009. There was the Bank for International Settlements warning about the consequences of debt and securitization. Lewis Ranieri, the creator of the private mortgage-backed security, warned about it all in mid-2006. Deutsche Bank went short on the market in 2006. There were books that were extremely good. Frank Partnoy, for example, wrote a book called Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (2003) that looks quite prescient and received little attention in the mainstream press.

It is not a matter of the press’s having to be a guru. That’s not what is required. Rather, it is about taking a hard look at how decisions are made on Wall Street, what the real motivating factors are. Is an $18 million bonus really justified? Are these people really taking risk? If they are taking risk, why are they losing so rarely? Risk is about losing as well as winning. There are lots of questions that could be asked without having to make some kind of crystal ball judgment about whether something has gone too far.

So when can the business media be good? Only after the fact? After the crash? One of the sad trends of the 1990s was when the use of securities research as a sales tool to get underwriting business became institutionalized. These companies circulated internal memos that talked about compensating securities analysts who were supposed to be independent. The compensation was formally based on the amount of underwriting business that was gotten. I do not believe the media made enough of this in the 1990s, even as it became almost absurdly obvious during the IPO craze that began with Netscape in 1995. The media came down on high tech when the bubble burst, but not sufficiently before then. It is one of many such examples.

CNBC, I believe, had a real role in creating the speculative bubble of the late 1990s. I remember hearing interviews with money managers who spoke as if they had some historical perspective, offering advice such as, “Now, I don’t want any of you to buy this stock unless you hold it for the long-term, at least five years.” Economist Jeremy Siegel’s landmark study, Stocks for the Long Run (1994), came out only a few years before that, so maybe it had some influence. Siegel suggested that, more so than formerly recognized, stocks were less risky if held over time. But five years was certainly not the long run—not even close.

In addition to being a watchdog, we must all remember, the press is a money-making operation. It has to appeal to an audience and win readership and viewers. In the 1990s, if you looked at ad pages in Business Week, Forbes, Fortune, Wired magazine, and countless imitators of Wired, you would see that Internet and related advertising was enormous. “We never saw an industrial revolution like this,” said one magazine after another. Usually circumspect and skeptical economists were also caught up in the enthusiasm. They were affected partly by the fact that people love to read upbeat, optimistic fairy tale stories.

I think coverage of the recent crisis has been good for the most part, but that is partly because the bad news is out there and the present accepted norm is to criticize practices on Wall Street. Again, after the fact. In such moments, modern business journalism often rises to the occasion and goes after the truth—and serves the public. The media can do its job in these times, going against the flow and not simply serving as conduits for ideas that are currently popular.

There are lots of writers and reporters with economics degrees; there are lots of people who have come from business backgrounds. Business reporting has become more sophisticated in recent years. Part of the problem, however, is that the audience or readership is not as sophisticated. Imagine if a sports reporter had to define what a bunt is in baseball each time that he wrote about it. That is what business reporting is often about.

I tried to do the best I was able to when I was a TV reporter for NBC. When you are in the trenches and you see what people want to read and what they want to watch, and what moves ratings, it becomes more obvious how hard it is to get people to pay attention to serious stories. It takes enormous effort and some money to do it as well. The reason fires and police actions dominate local TV is because they are the lowest cost-per-minute stories that can capture reasonable attention—that is, ratings. To report such a story, all one has to do is show up. To put together an economic story, and make it watchable, requires a serious expenditure: lots of tape, lots of analysis, lots of shooting.

We have a serious problem compounded now by free Internet information, which is going to undermine print, and which is clearly the main issue that people at The New York Times and similar outlets worry about. As Times columnist Frank Rich wrote, “Opinions . . . are cheap. Reporting the news can be expensive.”² The Internet is about opinion.

Skepticism should define the business media. It does not. Credulousness does. Following the pack does. Who will be the watchdog? I fear that once the current environment passes, the media will simply fall in line again. Who will protect the people then?

ENDNOTES

1. “A Monster Merger,” The New York Times, April 8, 1998.

2. Frank Rich, “The American Press on Suicide Watch,” The New York Times, May 9, 2009.