Could journalists have warned us of the global financial meltdown?01 august 2013, 15:05
It seemed like a simple enough task: tell those at an Astana Economic Forum panel session whether the press failed to warn the public about the global financial crisis of 2007 and 2008.
Forum organizers asked me to share my opinion on the issue at last month’s event because I’d been a longtime business writer and editor at the Los Angeles Times and other news organizations. I looked forward to being in the panel sessions because the moderators were two journalists I respect, Stefan Grobe of Euronews and Riz Khan of Al Jazeera.
My assumption as I began scouring the Internet for background for my presentation was that the press did blow it.
How could I assume anything else? After all, if the press HAD alerted policy-makers and the public, the world might have been able to avoid its worst financial meltdown since the Great Depression of the 1930s.
As I read article after article about the financial crisis, however, I realized that while most of the press blew it, some journalist did a good job of warning policy-makers and the public. The problem was they were a small corps, so they were ignored.
Most of the articles I scrutinized on the Internet were about the American financial meltdown and the crisis predictions of American business journalists. That’s because the meltdown started in the United States and spread across the world.
Like their American journalism counterparts, most business reporters in Britain, Kazakhstan and every other country the crisis affected – which was most – failed to sound the alarm as well.
Reading dozens of stories about the meltdown led me to conclude that non-journalists shouldered about 90 percent of the blame for the crisis, however, with the press only 10 percent.
The main culprits were those actively involved in creating the mess, not the reporters who chronicled it.
I’m talking about the greedy financiers who have pushed for deregulation of the U.S. financial industry for decades, lawmakers who have acquiesced to their demands, and regulators who have failed to be watchful.
Let me go on record as saying that this article is a mixture of facts and interpretation – that is, my opinion. Those who have studied the global financial meltdown have agreed on one point: It was very complicated, with hundreds of factors at play. Most of the differences of opinion about the crisis have centered not on the facts but about the interpretations of what happened, including who was to blame.
If American reporters had convinced policy-makers and the public that a Stateside financial crisis was imminent, the U.S. disaster might have been headed off, preventing a global meltdown.
Lots of American business journalists have concluded that too many of their colleagues were cheerleaders for an unfettered, deregulated capitalist system that the country’s titans of business see as the ideal.
“We believed that free markets were the best kind,” the renowned personal-finance columnist Jane Bryant Quinn said at a meeting in 2009 of America’s Society of Business Editors and Writers in Denver, Colorado.
It became “unfashionable” after the United States began deregulating its financial system in the 1980s for business journalists to write about regulation, writer John Tomasic quoted her as saying at the conference. So they didn’t write about it, she said.
Another reason that many American journalists succumbed to Wall Street’s pablum was an infatuation with top financiers, who can be larger than life, charismatic and very persuasive.
Still another reason was that an American reporter’s failure to charm a financial figure could lead to that figure refusing to talk with the journalist -- spurning an invitation to appear on the reporter’s television show, for example.
Writer Rory O’Connor noted in the Huffington Post in 2009 that some American journalists did sound the alarm about a financial meltdown. But their ranks were so thin that they lacked the combined clout to awaken the public to the threat.
Three of the problems that the majority of American journalists failed to write about were:
-- The negative impact that the latest round of U.S. deregulation was having on the American financial system. A key change was allowing investment banks to get into lines of business that had previously been restricted to traditional banks. The result was that investment banks brought their penchant for risk-taking – including making riskier loans -- to the broader banking sector.
-- The millions of home mortgages that financial institutions were extending to people with poor credit histories, many of whom would be unable to repay their loans in even the mildest economic downturn. The loans were called sub-prime because they were going to those considered less than prime borrowers. That’s why the housing collapse became known as the “sub-prime lending collapse.”
-- The threat to the financial system of risky new securities called derivatives, particularly a derivative called a credit default swap which would play a key role in the collapse of Kazakhstan’s largest bank, BTA.
By far the most important factor in the meltdown of the American financial system was the continuing deregulation of that system, it seems to me.
I remember President Ronald Reagan’s disastrous deregulation of American savings and loans in the 1980s.
The argument for deregulating was that savings and loans were strapped with too many government restrictions. Ease those regulations, the argument went, and the savings and loan industry could make tons more money for its investors – and rev up the American economy.
What the deregulation actually spawned was:
-- A savings-and-loan industry meltdown rooted in management excesses that would not have been possible under the previous, more prudent regulations.
-- A government rescue of the industry because no bailout would have meant major damage to the entire U.S. economy.
-- A number of industry leaders going to prison for becoming so greedy during the new, relaxed regulatory atmosphere that they broke the law.
As a journalist, I’ve watched this pattern repeat itself during subsequent deregulations of the American financial system.
And I’ve asked myself: Don’t Americans get it? How can they stand by and swallow another round of deregulation that leads to disaster, a government bailout and white-collar crooks going to prison?
Yet deregulation hasn’t stopped.
It’s not just Americans who should be upset about U.S. deregulation. The whole world should be.
President Nursultan Nazarbayev has rightfully identified American financial-system excesses as the key precipitator of the global financial meltdown of 2007-2008.
He contends that, six years after the crisis started, it’s continuing – a view shared by many economists, heads of state and government policy-makers across the globe.
The president came up with the G-Global initiative a couple of years ago to try to reduce the chance that a financial meltdown in the United States, Europe or elsewhere in the developed world would go global again.
At the heart of the G-Global initiative is the notion that a lot more countries than the Group of Eight or Group of 20 ought to be setting policies that impact the entire world’s financial system. President Nazarbayev has said that 70 or more countries ought to be involved in collective financial policy-setting, including developing countries like Kazakhstan.
Many practical problems would need to be overcome for G-Global to work. For example, how would you get 70 countries to reach consensus on a challenge as sweeping as creating a new global financial system? And how could you convince a developed country like the United States to abide by financial policies set by an international organization rather than by policy-makers within its borders?
And should a collective financial policy-making effort be under the auspices of the United Nations, or should a separate international organization be set up to carry it out?
Practical problems aside, President Nazarbayev has succeeded in getting a lot of people thinking about a fairer collective approach to international financial policy-making. Getting the message out there is always a necessary first step to concrete action.
Now let me turn for a moment to the question of whether journalists in Kazakhstan failed to warn the public about a financial crisis, as their colleagues in the United States did.
The answer, of course, is yes – they didn’t sound the alarm stridently enough or loud enough to be heeded. If they had, the crisis wouldn’t have enveloped Kazakhstan.
Many journalists here knew that Kazakhstan banks were borrowing billions of dollars from banks in the West, then lending it to locals for business projects and to buy homes, cars and other big-ticket items.
Some of those same journalists knew that banks were loaning money to many people with poor credit histories – the same thing that was happening in the American real-estate market.
On the surface, banks’ borrowing from the West was a nifty profit scheme: You take out a loan at 6 to 8 percent from overseas, then lend the money to a Kazakh customer at 11 to 18 percent .
As long as the economy was humming, banks couldn’t miss.
When the American financial meltdown went global, however, the casualties included Kazakhstan’s oil, gas and minerals industries – the mainstays of the economy here.
With the domestic economy reeling from a global plungwe in natural-resources prices, layoffs began occurring. Many of those who had borrowed money to open businesses and buy homes were unable to repay their loans.
The government had to take over three failed banks -- BTA, Alliance and Temirbank – and pump money into KazCommertsBank and Halyk Bank.
The financial system as a whole is still shaky, with one of the main problems being that BTA – once the country’s largest financial institution – keeps losing billions of dollars as year.
If Kazakhstan journalists had understood the threat to the economy of domestic banks borrowing so much from overseas, they could have alerted policy-makers and the public, according to a savvy local-journalist friend of mine. But the danger wasn’t apparent to journalists, she said -- just like the danger of the U.S. sub-prime mortgage situation wasn’t apparent to most American business journalists.
Kazakhstan journalists also were unaware of a nasty profit-making strategy that the American investment bank Morgan Stanley was ready to use against BTA Bank, which until the crisis was the pillar of Kazakhstan’s financial system.
Morgan Stanley had loaned BTA $500 million. But it had also bought credit default swaps with a face value of $600 million.
This meant that if BTA defaulted, Morgan Stanley would make a $100 million profit -- $600 million from the credit default swaps minus the $500 million in loans that BTA was unable to repay.
When Kazakhstan’s government stepped in to take over a reeling BTA, Morgan Stanley invoked a silent-bombshell provision in its loan contract with the bank. That provision specific that if there were a change of ownership at BTA, Morgan Stanley could demand an immediate repayment of its loan.
Since BTA was unable to repay the $500 million right away, Morgan Stanley was able to cash in on the $600 million worth of credit default swaps it had purchased.
It was the first time in history that a creditor of a major bank had taken a step to throw the bank into default.
It drew condemnation from both Kazakhstan and American business journalists, who didn’t see it coming, either.
Let me conclude by saying there was no way I could include all the facts, perspective and opinion about the global financial crisis in this article. That’s because the meltdown was so complicated that it would take dozens of pages to cover it fully.
That means that some of you may think this piece is oversimplified. I’ll take that hit.
Others of you may disagree with my interpretation of events. If that’s the case, fire away. The Comments section of this blog beckons. I’d love to hear from you.