In August last year, with America in the grip of its subprime mortgage crisis, financial historian Niall Ferguson described in a Financial Times article how a “local squall” in the world’s largest economy could develop into a catastrophic global “perfect storm”. Until that point, the credit crunch had been primarily a US problem with a limited global impact. But as Ferguson pointed out, a recession in the US and Europe would have potentially disastrous consequences for emerging markets.
Subsequent events have borne him out. The credit crunch became a full-scale banking crisis, plunging the US into a recession which is now threatening to engulf the global economy. Although South Africa is not yet in a recession, growth forecasts have been scaled down and the credit crisis has limited government’s ability to raise money for infrastructure expansion. The myth of “decoupling” of the developing economies from the developed world has been laid to rest. America has exported its crisis to the world, and South Africa is feeling the effects.
Yet, as Finance Minister Trevor Manuel pointed out with some measure of irritation, on the day after Lehman Brothers fi led for bankruptcy – the seminal event that precipitated the US banking crisis – one of South Africa’s national daily newspapers led with a story about the English language ability of Joel Santana, the national soccer coach. Were the South African news media unable to grasp the importance of the event, or to imagine the possible consequences for the South African economy?
It is easy to point a finger at the news media, and to say that journalists did not perform their vital “watchdog” role in exposing some of the financial derivatives and fancy accounting underlying the crisis. But economics at the best of times is not a simple subject, and the current crisis is the result of highly complex processes which many people – including some central bankers – still struggle to understand.
If central bankers in the developed world failed to monitor and control the risks posed by some of the derivatives underlying the crisis, can one blame journalists for failing to understand these “financial weapons of mass destruction”, to use Warren Buffet’s term?
How did we get where we are? Simply put – and the reader will immediately realise that this is not an easy process to describe within the constraints of, say, a television news bulletin – the crisis had its origins in a property bubble in the US, fuelled by low interest rates and easy credit. The bubble developed because people thought house prices would continue to rise indefi nitely, and they could refinance their mortgages at a profit.
Financial markets introduced ever more complex derivative instruments ostensibly aimed at lowering the risk of lending, but also encouraging consumers to borrow more by enabling banks to offer more generous terms. The so-called “sub-prime” market – lending to borrowers with no credit record or proven ability to re-pay – ballooned. Household indebtedness in the US rose from 90 percent of disposable income to 133 percent in less than a decade. The bubble burst when house prices started falling, sparked by defaults among sub-prime borrowers, but soon among more creditworthy home-owners too. The property crash rendered many of the mortgage derivatives held by banks worthless, or at least impossible to price.
Bear Sterns, one of America’s Big Five independent investment banks, collapsed in March; by the end of September, Lehman Brothers and Merrill Lynch had also disappeared as independent entities, and the remaining two – Goldman Sachs and Morgan Stanley only survived by transforming themselves into commercial banks.
Interbank lending came to a virtual halt because banks could not trust their counterparties. Soon, the trouble spread to the “real economy”, where the credit crunch made life difficult for businesses and consumers alike. The US slipped into recession, followed by the UK and Euro zone. As demand in these economies slumped, commodity prices crashed, slowing growth in developing economies such as ours.
The property bubble and credit expansion process was to some extent mirrored in South Africa, where house prices also rose rapidly, in tandem with an increase in household debt. However, as Hilary Joffe pointed out in an excellent article in Business Day (October 8, 2008), South Africa escaped its own sub-prime crisis this time round partly because of stricter lending rules, but also because we had already experienced one in 2002, when untrammelled “micro lending” brought Saambou Bank and a number of smaller institutions to a fall, leading to tighter risk control measures in our banking industry. We did not, however, escape the effects of the global economic downturn.
By and large, South Africa’s financial media did a good job of reporting the financial crisis as it unfolded, especially in trying to making sense of the complexity that came with it.
The website Fin24.com, for example, introduced a “Jargon Buster” feature to explain some of the fiendishly complex instruments underlying the crisis. Readers who followed the story closely in Fin24 in other financial media, such as Business Day, Financial Mail and Moneyweb, would emerge with a good understanding of the problem. But good financial journalism is about more than explaining the jargon, important though that is. It is also about seeing the bigger picture.
Much of the journalism focused – with more than a touch of schadenfreude – on the soundness of our own banks, without foreseeing the depth of the economic consequences of the US banking crisis. In this, journalists were not alone. Most of the world’s economic and investor fraternity failed equally dismally in foretelling the crisis. Those who did, like economists Paul Krugman and Nouriel Roubini, were slated as Jeremiahs. We ask why journalists didn’t tell us what was coming, but perhaps we didn’t want to hear.
While South Africa’s financial media were making a valiant attempt to serve their particular audiences, the popular media were very slow to grasp the implications of what was depicted as a localised American problem. I have yet to see one coherent, holistic piece of popular journalism analysing what the global economic slowdown, the stock market plunge, the credit crunch and the currency’s weakness will mean for ordinary South Africans. In this respect, the contrast between South Africa’s popular media and their US counterparts could not be more stark.
There, the major news media have been giving saturation coverage aimed at ordinary readers, not market specialists. One of the best pieces of journalism about the crisis was done by a journalist who, by his own admission, knew nothing about economics or markets – and therefore asked a stupid question.
Alex Blumberg is a producer at National Public Radio who became fascinated by the sub-prime crisis. His stupid question: Why are they lending money to people who can’t afford to pay it back? It turned out to be the right question. Blumberg’s one-hour piece, “The Giant Pool of Money” (thislife.org/Radio_Episode.aspx?sched=1242), was broadcast in May and became “a much-downloaded primer on the mayhem that followed”, according to David Carr, writing in the New York Times.
That is the kind of journalism South Africa’s media – public or otherwise – are not yet producing on the financial crisis and its consequences for ordinary South Africans. However, the greatest failure of the news media already occurred before the financial crisis. Our media, like their counterparts in the developed world, were simply too eager to accept the structural conditions that allowed the property bubble to develop in the first place. “The history of speculative bubbles,” wrote Robert Shiller in his book Irrational Exuberance, “begins roughly with the advent of newspapers”.
John Kenneth Galbraith convincingly documented the role of the media in fuelling the investment trust speculation which preceded the stock market crash of 1929 and the Great Depression. Shiller describes the pattern repeating itself during the Dot-Com bubble of the late 1990s, and – although I have no empirical evidence – it seems obvious to me that the media played a significant role in diffusing the beliefs and theories which fuelled the asset price bubbles which caused the present financial crisis.
In this, journalists were serving short-term corporate and market interests rather than the public.
Robert Brand holds the Pearson Chair of Economics Journalism at Rhodes University. He has worked as a financial journalist for Bloomberg News, and as a reported and news editor for local newspapers, including The Star. He is currently researching the history of South Africa’s financial press.
- This article first appeared in The Media magazine (February 2009).