Why so many failed to see the crisis coming


WORLD VIEW:RETROSPECTION IS the way to understanding, we are discovering so painfully during what the IMF described this week as “by any measure . . . the deepest global recession since the Great Depression”. Why was it not more commonly seen coming? What lessons can be learned from that when organising future safeguards? asks PAUL GILLESPIE

In a speech this week in Yale university Lionel Barber, editor of the Financial Times, asked what responsibility journalists in the financial media have for not foreseeing it. He mentioned four main reasons – ahead of which he said by way of mitigation that journalists were not the only ones so to fail. Political and business leaders, regulators and economists all fell down on this job, as can now be seen in retrospect. Since these are principal decision-makers and wielders of power they set and frame the terms on which the media report their activities.

And yet if media are to live up to the self-proclaimed role as critics and accountants of power rather than its mere corporate stenographers they must accept some blame for such a lack of foresight. Barber says the financial crisis started as a highly technical and opaque story about credit markets that took months to go mainstream. Reporters working there found it hard to interest their superiors, who controlled space devoted to stories of rising property prices and economic growth and some of whom did not want to antagonise advertisers.

That said, financial journalists did not understand why it should have been necessary to regulate the derivatives trade that drove the credit boom from 2002-2003 onwards, taking their cue from policymakers who almost without exception favoured deregulation. Journalists should have seen more clearly how risky were the implicit state guarantees given to US banks promoting subprime lending.

Thirdly, they “failed to grasp the significance of the growth in off-balance sheet financing by the banks . . . the overall concept of leverage” and the explosive growth of structured investment vehicles at the height of the credit boom. And fourthly, journalists, regulators and economists were too slow to grasp that a crash in the banking system would have a profoundly damaging impact on the real economy. “This was fundamentally wrong.”

It is quite a catalogue, demonstrating how important it is to have a “systemic” understanding of such issues, as well as a technical one. It is difficult for journalists alone to develop that, of course, when the prevailing wisdom is as intolerant of criticism as the neoliberal financial order proved to be during the credit boom. This was the case in Ireland as well as the US and Britain, which Paul Krugman recognised in his New York Timesarticle this week as exemplars of that system.

Over the same period Irish banks borrowed wholesale on international credit markets, and especially German ones. That is how they financed the 2002-2007 property and credit bubble, the scale of which far outgrew the capacity of Irish savings and deposits to cover such lending. In retrospect, was this not a highly significant shift towards international markets? How was it reported at the time? Was it highlighted in the media, benchmarked as an important indicator, or warned about by economists, financial regulators and in Budget statements?

I don’t know the precise answers to these questions, but have the distinct impression that this strategic shift was overlooked by most of these authorities (although David McWilliams did deal with German credit in articles and books). If that is so it is as significant as the failings in more metropolitan financial media. Most of the toxic lending was bunched into a few short years, with taxpayers now having to bear the cost of socialising the losses involved.

There is a strong case for a good, fast book tracking economic behaviour, political decisions, media reportage and warning voices during the 2002-2007 boom years. It could compare the costs saved by the McCreevy-Harney low tax, low spend model to the costs now being incurred to rescue the real economy and how the gains privatised then are being redistributed now.

The lack of systemic concern and the failure to probe vulnerable or neuralgic points of this economic model proved so costly that it is well worth the effort involved to discover why that was so and try to mend the gap. But it would be naïve to expect only journalism to respond to such an imperative.

Financialisation of the real economy took up to a decade to establish in the Anglo-American centres of capitalism – from the late 1970s to the mid-1980s – and then became an orthodoxy driven by a creed of neo-classical economics and neoliberal politics that put efficient markets, deregulation and a weaker state at the heart of their analysis.

In these circumstances systemic criticism became increasingly difficult in metropolitan or national media – or in universities, think-tanks, business or state settings. Scientific and behavioural orthodoxies established so forcefully at such critical junctures are then disciplined tightly during the subsequent path dependent period. Thomas Kuhn, the philosopher of science, famously described this pattern as one of paradigm shifts followed by normal science.

Lessons to be learned include a capacity among the major actors concerned, including the media, to be much more critical of the orthodoxies that will emerge in any recovery from this crisis. Inflation is one danger. Repeating a path of growth which will reproduce the existing problems is another. Over all the existing solutions looms the ecological cost of restoring consumption- and debt-led growth.