“Financial Crisis” & Media Compartmentalising

Nov 16, 2011 – Media compartmentalising, like frames, can be difficult to spot – particularly in reports which seem factually correct and relatively “balanced”.

Take the global financial meltdown (or “credit crunch”, if you think it resembles a breakfast cereal). Much of the reporting of this complex set of events seems “correct” factually, and even in assigning blame. And yet… if you’re like me, you’ve found it inadequate and unsatisfying. There’s a massive cognitive disconnect here, and it can’t be explained in terms of simple media “bias” (political or otherwise).

Here’s the basic narrative from the best media coverage (in a nutshell and in my words):

The financial collapse stemmed from an ideology (Neoliberalism), in which the financial sector was given free rein to profit with minimum regulation – eg from the high-risk (and very lucrative) subprime lending market. Its false sense of security was due to inadequate models of risk which ultimately failed when the US property market crashed.

That seems accurate enough, based on the known facts. So why the cognitive disconnect? I would guess it’s due to media compartmentalisation of the following two areas:

1. Framing of market ideology (“Neoliberalism”, “Capitalism”) in terms of things like “business efficiency” and “competition” in the real world.
2. Framing of specific “failures” (particularly to do with “risk” & regulation) in the “virtual” world of finance.

The media reporting of the “facts” of the meltdown tends to use 2, with 1 as general background. The “failures”, as reported, occurred in 2, but the fundamental role of 1 in creating the conditions which led to those “failures” (and to the whole “crisis”) is rarely explored.

There’s a huge disconnect, for example, when regulatory “failures” are reported merely in terms of absence of attention to details and technical matters. The years of deregulation, and the failures of regulators, were both due to a culture in which “market discipline” was believed to be the most “efficient” form of regulation. (See my previous piece on the “market discipline” frame). This was an ideology, a sort of secular religion, in which the “free market” was seen as superior to all other forms of organisation.

Given the framed ideological primacy of competitive profit-making and the presumed non-reality of other kinds of social value, market self-regulation was taken for granted as the right way. One result of this (among others) was the rapid emergence of a multi-trillion-dollar market in over-the-counter derivatives – unregulated, not counted by any central authority… plus international agreements allowing banks to measure their own riskiness.

John Lanchester (author of Whoops! – one of the few accounts of the meltdown to successfully integrate 1 & 2 to produce a convincing narrative) gives an example of conventional media reporting, regarding the ideology:

“You get a glimpse into the world-view when you look at The Economist. It is […] full of good first-hand fact-finding. […] But every single piece, on every single subject, reaches the same conclusion. Whatever you’re reading about, it turns out that the solution is the same: more liberalization, more competition, more free markets. However nuanced and original the detail in the bulk of the piece, the answer is always the same; it makes The Economist seem full of algebraic formulas in which the answer is always x.”

Of course, if media reports were framed in a way that showed clearly how “x” was the main, central, primary, fundamental factor (or “cause”) creating the conditions that led to disaster, they couldn’t very well present “x” as the solution to every economic scenario. There are certain realities that The Economist (and other similar media) cannot ignore if they wish to remain remotely credible. And so we get compartmentalisation, whether intentional or not.

There has been, for a long time, a cultural divide in Britain between the The City (finance capitalism) and dirty industry/manufacturing. Ironically, the market ideology which led to massive expansion of the financial sector (over the three decades since Margaret Thatcher came to power) is built on a metaphorical framing (concerning things like “efficiency” and “free competition”) which goes back to Adam Smith’s era. When Smith wrote about the “division of labour” and the “invisible hand of the market“, etc, he wasn’t thinking about risk-modelling for Credit Default Swaps (CDS) on Collateralized Debt Obligations (CDO) on pools of subprime mortgages. He was thinking about “tangible” things like pin factories.

(The insurance giant AIG was the biggest player in the CDS market. It was brought to its knees by CDSs on CDOs, but was Too Big To Fail, and enjoyed the biggest bailout of a private firm in history. How’s that for “efficiency”, “competitiveness” and good old-fashioned industriousness).

Framing “risk” – and its importance

In my previous piece, and above, I’ve singled out “risk” as the all-important factor in the financial sector (in contrast with the importance placed on “efficiency” and “free competition” in general business). Why? Because risk determines the outcomes of finance-capitalism in a way that is far removed from our conceptions of things like competitive efficiency in the “real world”. This is illustrated by how banking works, even at a basic level…

Banks pay a low rate of interest to depositors, and charge a higher rate to borrowers – thus making a profit. Banks don’t really make money from providing a “service” – they make it from taking on risk (eg the risk of loans going bad). It’s a “respectable” form of gambling. There are, of course, rules governing the amount of capital (eg deposits) that banks must keep against the risk of loans not being repaid, etc. These rules limit the amount of lending (and other speculation) that banks can make – ie the level of risk they can take on. But they also limit the banks’ profits. The banks hate this. The ‘innovative’ financial products I’ve been writing about (the ones which played such an important role in the financial meltdown – CDSs, CDOs, etc) were designed to get around the rules on risk – in very complex, and profitable, ways – with the effect of making it practically impossible to monitor systemic risk.

Why Nassim Taleb seems angry…

If you haven’t already seen this entertaining clip of Nassim Taleb (author of The Black Swan) on Newsnight, I recommend it. Taleb is angry with “tie-wearing economists” peddling bogus measures of risk in the financial markets.

If you pay attention to what Nassim is saying, you’ll see that he’s talking almost entirely about risk. (If you’re new to the topic, reading my previous piece might help to clarify some of his points). One of the highlights is when presenter Emily Maitlis asks, “Does this require a mindset change?”.