Expert Tips on Covering the Financial Crisis

Expert Tips on Covering the Financial Crisis
By Barbara Bedway - E & P
Published: February 18, 2009

Barry Ritholtz, who runs equity research firm Fusion IQ and writes one of the Web's most popular economics blogs, The Big Picture " much quoted nowadays by reporters " considers himself "unburdened" by a classical economics education, and so "is free to ask the questions most economists can't." And Ritholtz, 47, wants reporters to ask more and better questions when confronted with economic data in these days of crisis.

You might start by questioning this allegedly bedrock economics principle: Private markets invariably are self- correcting, and driven by rational human beings. And those rational human beings, so the theory goes, will make well-thought-out decisions that allocate scarce resources so efficiently that ultimately we all benefit.

Or maybe, as we've now painfully learned, not so much.

On Ritzholtz's must-read list for reporters: Thomas Gilovich's "How We Know What Isn't So: The Fallibility of Human Reason in Everyday Life," because "it helps you understand where your mental processes can lead you astray." Ritholtz’s own book, "Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy," had been slated for publication this month. But his publisher, McGraw-Hill -- which owns Standard & Poor, one of the ratings agencies lambasted in Ritholtz's book -- claimed to have last-minute concerns about the corroboration. After extensive back-and-forth, Ritzholtz concluded the publisher's intent was to "water down my content." He asked to be released from his contract, and is shopping the book to other publishers.

His wish list for reporters covering this and future financial crises includes:

Be more skeptical of sources. "You have to play lawyer, ask what is this person's motivation for saying what they're saying," claims Ritholtz. He found the best reporting on the automobile industry's true financial predicament was at an upstart Detroit Web site that supplies unvarnished automotive reviews and editorials about the industry, The Truth About Cars. "They understood the business and its challenges; they were railing for several years against the unsustainable nature of the capital structure of the Big 3," he says.

Question data, constantly. Last March, for example, The Wall Street Journal ran a story saying the vast inventory of foreclosed homes was starting to bring people back into the housing market, and cited figures from the National Association of Realtors showing a jump in sales in February of 2.9% from the month before. But Ritholtz points out that in every year home sales are lowest in January, so changes from January to February are measuring seasonal differences, not actual improvements in house sales. The tendency to overemphasize the most recent data point in a monthly series is called the "recency" effect. "It is a foolish way to ignore the trend and give greater emphasis to today," he notes.

Give good context. The struggle to control the narrative of how the housing crisis and ensuing financial meltdown occurred is in full swing, exemplified by Karl Rove's op-ed in the Wall Street Journal in January that fingered Fannie Mae and Freddie Mac as among "the principal culprits of the housing crisis." But Ritholtz and others point out that the two government-sponsored enterprises, though they became too large and overleveraged, had nothing to do with the explosion of high-risk lending that took place between 2002 and 2007.

Dean Baker, co- director of the Center for Economic and Policy Research " whose blog, Beat the Press (he also appears at The Huffington Post), frequently faults the major dailies for quoting economists who have gotten the financial crisis wrong " urges reporters to widen the net. He tells E&P that about a year and-a-half ago he talked to a reporter from a major metro daily about David Lereah, former chief economist for the National Association of Realtors, and she asked, "Do you think he's biased?"

Baker, author of the new book "Plunder and Blunder: The Rise and Fall of the Bubble Economy," comments: "If someone works for a trade association, they're there to push the industry line. Talk to someone with another perspective."

Also instructive is the experience of Miami Herald reporter Jack Dolan, who co-wrote a major investigative series published in 2008 about the ex-cons employed in the Florida mortgage- brokerage industry throughout the housing boom. That angle came from a story he was reporting in 2007 on Miami's proliferation of toxic mortgages. When he ran though a criminal-background check the names of some mortgage "experts" he planned to quote, he was stunned to find crimes including fraud and violation of RICO statutes.

Baker singles out the data-driven coverage of Bloomberg and the work of New York Times reporters Gretchen Morgenstern, David Leonhardt, Floyd Norris, and Eric Nash for special praise. He points out the "overwhelming majority" at major outlets such as The Washington Post, Wall Street Journal and NPR did not want to question that Alan Greenspan " who believed a real estate bubble couldn't happen and that Wall Street could largely police itself " might be wrong. And he understands why.

"There are 'structured incentives' in reporting, the same as in economics," he offers. "If you step out of line, you could be wrong, and so you're taking a huge risk. If a lot of people are saying the same thing, then everyone is wrong, and who could blame you? In that situation, it's not surprising a lot of people don't speak out."

One bright spot Baker finds is the role the Net has played in bringing clarity to the crisis: "I'm impressed by voices such as Calculated Risk, where I've learned more about the obscure aspects of finance. I think as we go forward and get a multiplicity of sources, that opens up the possibility you will see better reporting because there will be people out there to correct the official line. Hopefully people will gravitate to the sites where there is expertise."