Financial contagion is a powerful media narrative for business journalists. The fallout makes sellable news copy: the melodrama of market volatility, trainwrecks and corporate collapses, and the spectre of nation-state breakdown and global disorder. Chroniclers from Charles Mackay to Charles P. Kindleberger have recognised this madness in markets. So why hasn’t this been applied to business journalists apart from critiques like Thomas Frank‘s sobering One Market Under God (Anchor Books, New York, 2000)
For example is the Australian economy facing a deep financial crisis compared with the US subprime fallout? The Telegraph‘s Ambrose Evans-Pritchard contends yes. Evans-Pritchard uses inductive reasoning to build many examples that illustrate his conclusion that ‘that the Antipodes are tipping into a serious downturn’. These include share write-downs at the National Australia Bank (NAB) and New Zealand’s Guardian Trust; rising household debt and current account deficits in Australia; cross-currency volatility on the forex market; and turbelence in the regional economies of Japan and New Zealand. Evans-Pritchard’s examples collectively add up to a disturbing and pessimistic view of the near future.
On closer examination many of Evans-Pritchard’s examples fall apart, partly because he over-relies on comments from analysts at BNP Paribas and Lombard Street Reearch instead of doing his own evaluation. NAB’s write-down was very likely due to high exposure to Merrill Lynch derivatives and ML’s write-down announcement 12 hours earlier in US markets. The $A still remains strong against the $US and the shifts are due to forex market volatility. Evans-Pritchard fails to explain which productivity growth gaps are meant or the possibility that this is due to adjustment lags after 1990s reforms. He glosses over the different dynamics and histories of Australian, Japanese and New Zealand markets to reach a false consensus of Pacific Rim economies.
Some comments are nonsensical in the context of free market ideals: the Reserve Bank of Australia‘s monetary policy is not Keynesian and thus is open to ‘vast inflows of Asian capital’ — into investments and property developments — just as the US economy is open to investment from sovereign wealth funds. Perhaps Evans-Pritchard’s fears of Japanese money are about Bondi Beach’s gaudy tourism? If your ideal is free market flows of global capital then you have to accept the entrepreneurial sources who will take on the risk-return (if that’s not your ideal, or the ideal turns out to have some adverse consequences in practice . . .).
Evans-Pritchard is closer to the mark in his comments on the current account deficit (macroeconomics) and household debt (microeconomics). Australia’s mining and resources boom won’t cancel out its current account deficit alone, and given the economy’s structure, its reliance on cheap imports and its debt servicing costs it’s ridiculous for Evans-Pritchard to think so. Household debt and mortgage stress levels are worrying – but Evans-Pritchard leaves out the role of inflated house prices, interest rate risk, and consumer expenditure. Despite the high rents and shortage of new houses Australia is nowhere near as exposed to collateralised debt obligations and subprime mortgages as the US is.
Business journalists can be guilty of creating noise in the face of financial contagion. As Henry Blodget observes in his contrarian book The Wall-Street Self Defense Manual (Atlas Books, New York, 2007) the financial media wants to hold your gaze: ‘You will know the arguments and action of the day, recognize the major players, and feel the market excitement. You will develop strong opinions about the future.’ (p. 203). Who cares if the strong opinions are formed on the basis of noise rather than signals? Instead, Blodget argues that we should see Bloomberg and CNBC as players in a financial services ecosystem who thrive on melodrama and noise, especially during a contagion, crash or panic.
The philosopher and post-trader Nassim Nicholas Taleb is even more scathing in his contrarian book Fooled by Randomness (Texere, New York, 2004): ‘To be competent, a journalist should view matters like a historian, and play down the value of the information he is providing, such as by saying: “Today the market went up, but this information is not too relevant as it emanates mostly from noise.” He would certainly lose his job by trivializing the value of the information in his hands.’ (p. 58). As Evans-Pritchard’s overreaction to the NAB write-down and cross-currency fluctuations in the forex market show, he and many other business journalists would fail Taleb’s test because their reportage is a reaction to financial market events that are noise, and don’t factor in the dynamics of chance, randomness and volatility.