Have business reporters lost their souls?
COMMENTARY | September 13, 2007
How did the business press miss the unraveling of the subprime mortgage market? Martin Lobel writes that news organizations cover business like a horse race these days -- and have forgotten that a vigilant concern for the lot of the little guy, for the greater good, and for economic justice is what leads to the most important financial journalism.
By Martin Lobel
If reporters and editors had more of a sense of what their role in a democracy should be, they never would have let the subprime debacle and the economic injustices of the past six years get this far without focusing on them constantly. In the back of their mind, possibly infusing some reporting, would be the expression, “The greatest good for the greatest number.”
Instead, most press coverage of economics and business could just as easily be applied to horse racing. The Dow is up. The Dow is down. So and so bought another company in a leveraged buyout. Yawn. Is it any wonder that most readers skip those stories?
If the press were doing its job, no one would have been surprised that our economy seems to be falling apart. Anyone who took first-year economics should have known that the economy was fragile. But who wrote the stories asking the tough questions? Where were the stories pointing out that, although corporate profits and the stock market kept rising, the middle class was losing economic ground, even though it was working harder than ever?
Why was productivity increasing, but not wages? Why was executive corporation compensation at record levels while middle class income was, at best, stagnant? Why did the top five officials of the largest 1,500 corporations in the U.S. on average receive 10 percent of the profits of their corporations? What was the impact of that cost on investment by those corporations? Are American CEOs really worth 10 times their British counterparts? What is the justification for paying American CEOs over 400 times the median income of their employees, while British CEOs get less than 50 times their employees’ median income?
Why didn’t the press alert their readers, most of whom are middle class, to the dangers of maintaining their life style by borrowing against the equity in their houses? Many people were encouraged by low initial interest rates to buy homes they could not afford in the expectation that housing prices would continue to increase. Why didn’t the press alert readers to the fact that the music was inevitably going to stop because housing prices were far above any rational economic level and that many people were going to be left without chairs to sit on? Where were the stories that this increase in housing prices disguised the fact that our savings rate was actually negative and we were eating into our capital?
Where were the stories about the Administration spending money like a drunk trying to max out its credit cards in the expectation that the bill wouldn’t come due until after it leaves office and can blame the next administration for the pain required to clean up its mess?
Where were the stories revealing that the Administration’s definition of conservative does not include fiscal matters because it dramatically increased our deficit, leaving the next generation to pay for the cost of its subsidies to the very wealthy? Its budget figures are a joke. The costs of the Iraq war are not even in the budget because the Administration is deliberately putting them into “emergency supplemental” appropriations. Why hasn’t the press pointed out that our growing balance of trade deficit gives China, Saudi Arabia and other large purchasers of government securities essentially a veto over our foreign trade policy.
Our tax system is a disgrace. Why isn’t the press pointing out that the tax code encourages multinational corporations to shift profits and jobs abroad while handicapping domestic businesses that have to compete against the multinational corporations; that enforcement has been starved although every dollar spent on enforcement conservatively brings in $13 in revenue?
How could we let hedge fund operators earning literally hundreds of millions of dollars a year get away with paying a tax rate of only 15 percent when they decided to bring their income back into the United States? Is the reason that the tax code is in such bad shape that members of Congress need to raise so much campaign money from lobbyists and the press does such an inadequate job of covering such a complex story?
Why aren’t there more stories about the fact that almost all the income growth went to about 1/10th of 1 percent of the population whose income soared while their taxes plummeted? Their income came largely from skyrocketing corporate compensation and from all the fees generated by unregulated, non-transparent off shore hedge funds. These hedge fund operators, who, on any given day, account for over half the trades on the New York Stock Exchange, are now fighting to keep their 15 percent tax rate on their income from hedge funds when they bring their money into the country from the tax havens in which their funds are “located.” Under their logic, Greenwich, Connecticut, where many of them operate, is considered to be part of a foreign country and their income from creating new forms of “investments” deserves to be taxed at a lower tax rate than their cleaning women’s income. Surely these stories could be written in a way that would interest middle class readers struggling to survive.
Now that the subprime mortgage derivative market has crashed and many financial “experts” have discovered that they are all using basically the same computer models and that there is no market for such illiquid and non-transparent assets, why are we not surprised that they are seeking a government bailout? Not, of course, they say, because they stand to lose money but because people who were bought more house than they could afford might lose their houses. Where are the stories showing that many of the “solutions” proffered protect the rich who were “too sophisticated” to need transparency and accurate information and leave the remnants for those may lose their homes because they too didn’t understand the risks?
With a few notable exceptions, news organizations have either missed these stories or have reported on them so infrequently that they might as well have missed them. From their work, reporters and editors seem to think that if an economic condition exists, such as the rich getting benefits and the middle class the short end of the stick, then that condition is supposed to exist. Not very skeptical, not very inquisitive, are they?
For democracy to thrive, there must be a vigilant press. Benjamin Friedman, the former head of the Harvard Economics Department, demonstrated in his book, The Moral Consequences of Economic Growth, that a sound and growing economy is essential to functioning democracies. And that, as Adam Smith and Thomas Jefferson understood, requires an informed public.
Martin Lobel is a partner in Lobel, Novins & Lamont, a Washington, DC, law firm, and chairman of the board of Tax Analysts (www.tax.org), a source for journalists.
Don't Blame BusinessWeek
Robert Hunter - AME, BusinessWeek
09/19/2007, 02:16 PM
I can't speak for other publications, but BusinessWeek had been warning about problems in subprime mortgages in particular and the housing market in general long before this summer. One year ago this month we published a cover story called "Toxic Mortgages." The deck said it all: "Deceptive loans. Phantom profits. And coming soon: a wave of defaults." Yet that was hardly the extent of our warnings. Plug the names Mara Der Hovanesian and Peter Coy into a journalism database and you'll find no fewer than 32 articles highlighting problems, predicting worsening conditions, or both. Some sample headlines:
* "Mortgage Lenders: Who's Most at Risk: As delinquency rates rise, red flags are flying over some aggressive finance outfits" (April 2006)
* "Bad Blood Over Bad Loans: Mortgage defaults are rising. Wall Street thinks banks should mop up the mess" (October 2006)
* "Risky Portfolios: Mortgage Lenders Feel The Chill" (November 2006
* "A Farewell To Arms? Not Quite Yet: New classes of lenders are jumping in to offer high-risk mortgages (December 2006)
* "Is a Housing Bubble About to Burst? As rising rates send mortgage payments higher, demand may cool" (July 2004)
* "When Home Buying by the Poor Backfires: For many families, a house can be a bad investment" (Nov. 2004)
* "The Mortgage Trap: Lenders are cranking out an ever-growing array of financing schemes and lowering standards to keep the boom going" (June 2005)
* "Where a Slump Would Hurt Most: Hardest hit will be areas whose job growth is tied tightly to construction" (Oct. 2005)
* "Prefab Gains Signal Housing Pain: Manufactured home sales are reviving. That may be bad news for the larger market" (June 2006)