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Media Culpa: Can the Media Start A Recession?
James Surowiecki, financial columnist for The
New Yorker, moderated a panel that included Christopher Byron, veteran financial
columnist for Bloomberg and The New York Observer, Malcolm Gladwell,
a New Yorker writer and author of the best-selling book The Tipping
Point, and Geoff Lewis, a long-time business journalist who recently lost
his job at CNBC during a company downsizing.
Part One: Was the Backlash
Inevitable? SUROWIECKI:
Chris, you were decidedly contrarian on the way up. Are you equally contrarian
on the way down, or do you see this as a healthy correction?
CHRISTOPHER BYRON: I try every week to restrain myself from an end zone dance.
I think that this was a media-fed but not media-created expansion, and we all
watched a collision occur.
Part Two: Does the Media Really
Matter? GLADWELL: ...During the Nineties,
investing in the market became a form of recreation. The rules changed. It was
a game that we played with our money. I seriously suspect that this was the
adult version of playing Nintendo.
Part Three: The Audience
Challenges SUROWIECKI: CNBC, if you think about
it, is the equivalent of ESPN. The virtue of ESPN is that the coverage of the
game does not influence the game. But ESPN wants every game to be close, and
that's what makes a game interesting. It wants every game to have momentum;
it wants every game to be exciting and to have big ups and big downs.
Part Four: What Are Business Journalists'
Roles From Now On? LEWIS: In my short span, business reporters have
gone from being the dregs of the newsroom to the stars. When I was getting into
the business, Woodward and Bernstein were the inspiration. Business reporters
attained glamour in the Nineties. It's extremely odd and ill-fitting, so maybe
a reversion to the norm would be a healthy thing. There is a chilling experience
here. You see that there are consequences of the way you report and the way
you edit. It takes a lot, especially in major media, to stand up and say: I
think the big trend story is bullshit. But we should do it early and often.
Part
One: Was the Backlash Inevitable? JAMES SUROWIECKI: On the upside the business
media was an advocate of the new economy. Since the turn happened, the media
has been very active in pushing the market down. Today what we want to talk
about is this: does the media matter? Maybe it doesn't matter at all. One of
the interesting things about consumer confidence is that spending has continued
to remain high even as consumer confidence has shrunk. The second thing is the
inevitable reaction on the downside. I'm going to start with Geoff Lewis who
was at BusinessWeek, one of the most important magazines that led the
way in conceptualizing the idea of a new economy. Is what we're seeing now an
inevitable backlash?
GEOFF LEWIS: Yes, I think so. Ideas catch on, and as you say, BusinessWeek
was in the forefront of this. We strove to conceptualize what was happening
out there. Part of what we're seeing here is a function of journalism itself.
We take very complicated things and make them understandable. We boil them down
into perhaps oversimplified metaphors. We had the information superhighway and
that gave way to the Internet itself and to friction-free capitalism. These
ideas caught on. I remember editing a story in the early to mid-Nineties where
we were putting a stake in the ground, and saying that the Internet was not
just this hangout for cyber-hippies, but was going to be profoundly influential
in the way business was conducted. I remember striving for the right metaphors
and the right ways to convey something that was invisible to most people. Two
or three years later these same metaphors came back in the form of business
plans and people were actually building companies on these ethereal notions
that were only intended to make complex ideas clear. The next phase was that
these business plans were snapped up by an oversupply of venture capitalists.
After the Netscape IPO, it became possible to take a company public that didn't
have much of a track record. The public became the venture capitalists of this
era. So the press became a much bigger part of promoting and expanding and introducing
these companies and these new stocks. That sort of snowballed. We always go
overboard. Like the markets themselves, we don't want to look like we were the
only ones that fell for this idea on the way up. So we're also going to be more
aggressive documenting how stupid it was on the way down.
SUROWIECKI: Chris, you were decidedly contrarian on the way up. Are you equally
contrarian on the way down, or do you see this as a healthy correction?
CHRISTOPHER BYRON: I try every week to restrain myself from an end zone dance.
I think that this was a media-fed but not media-created expansion, and we all
watched a collision occur. This entire process that we're watching now is just
the unwinding of how we got here. We basically lived through seventeen years
of a super bull market expansion that created phenomenal financial inflation
in the economy. In the Seventies, this inflation was confined to gold, raw materials,
and most principally, oil. In the Eighties, when the economy began to expand
again, money eventually came back into the economy in increasing amounts and
went into financial assets. We wound up with a super bull market in which the
NASDAQ Composite Index was selling at the peak of its price earnings multiple
last March--405 or 410 times current earnings. These are unprecedented numbers
in American history and certainly in economic history. It was the result of
being able to pull large numbers of people who had never been part of the investing
process before into this process. We all, as journalists, share the blame in
that. The greatest cheerleader of this entire process was CNBC cable. It basically
established itself as the premiere source of media information on financial
news. This was a self-created investment bubble that popped. It was inevitable
that it would, and we're living through the consequences. I think we'll come
out the other end and go back into this cycle again, but there will be a lot
of pain along the way.
SUROWIECKI: When you say the expansion was part of this credit bubble, does
that mean that you think the actual changes in the economy--the enormous rise
in productivity over the last 5 or 6 years, the GDP, the fact that unemployment
is 4% and inflation is relatively low--were illusions as well?
BYRON: Yes, I do. Not totally, but very substantially. I think there has been
some horrible, horrible economic reporting going on in this country for the
last ten years. One great example of that is the productivity myth. Now, a certain
amount of productivity gains we've experienced in this economy are clearly due
to information technologies--the spread of the computer, the Internet and all
of that stuff we're so familiar with. But the reality is that none of these
numbers added up to justify the kinds of productivity gains that economists
continued to report month after month and year after year. Three weeks ago,
we saw the first set of stories to come out of the 2000 Census that are beginning
to pop the balloon of the myth of American productivity. Those stories have
zeroed in on the fact that we have wildly undercounted undocumented foreign
workers in the American workplace. When you calculate productivity, it is a
very simple calculation: take the output of the economy (the total revenues
generated by all of American business), and the money that you spent on everything,
and then you divide it by the number of man hours worked by the labor force.
If there are 14 million people in this country who are not counted in the denominator
of that calculation because they're not being picked up by labor force surveys
every month, we're obviously going to get large productivity gains. In fact
we're possibly no more productive than we ever were. During the Nineties, these
rates were going up at a rate of 6% annually. Between the 1990 Census and the
2000 Census, what we're now finding out is that so many more millions of undocumented
workers are in this economy than we thought. That explains a lot of what we're
seeing in productivity.
SUROWIECKI: But we know that profitability was significantly higher for companies
in the Nineties. We also know the unemployment rate was lower. If we accepted
some undocumented workers, it was presumably much lower. If you include 14 million
people who are all working and add them, the unemployment rate dips to maybe
3.5%.
BYRON: But productivity gain cuts in half.
PART TWO: Does the Media
Really Matter? SUROWIECKI: Malcolm, you've done a lot of work on
how consumers think. Does the media matter to consumers? Does reading a headline
really affect consumer confidence?
MALCOLM GLADWELL: I'm a little skeptical. I will grant you that the quality of
business reporting over the last 5 years is not optimal. But then the quality
of reporting at any given time, about any given subject, is not optimal. My own
reporting is not optimal. So that doesn't really get us very far. The bigger question
is whether this bad reporting leads or follows public opinion. I would love someone
to give me a single strong piece of evidence that said that these dramatic dips
in either consumer confidence or in the market were the result of bad news. If
you went to the day before the big NASDAQ market dip in March 2000, would you
have found on the front page of the newspapers and CNBC a raft of really bad news
saying it's all going to come crashing down? You wouldn't. You would find it the
day after it happened. I'm baffled by this notion that there is a linear, predictable
relationship between news in the media and people's behavior. I happen to think
the recent news about Intel stock was good. I reacted to negative reporting about
Intel by buying stock and having confidence in Intel because I'd thought they
had hit rock bottom. Now a lot of other people over the course of the last ten
years have bought Intel for precisely the opposite reason--because they read really
good news and all their friends were buying Intel and they wanted to jump on.
Both are acting in the same way, but for profoundly different reasons. Consumers
respond in an infinite number of ways to the same pieces of information depending
on their own psychology and their own circumstances. I think that we need to look
elsewhere for examples of why there are these general shifts in consumer confidence.
SUROWIECKI: Do you see any difference between consumer behavior and investor behavior?
GLADWELL: The dynamic is only different in the sense that, during the Nineties,
investing in the market became a form of recreation. The rules changed. It was
a game that we played with our money. I seriously suspect that this was the adult
version of playing Nintendo. The rules of playing Nintendo are fundamentally different
from the rules of buying a television set. The thing with games is that they have
their own sort of internal rules, and those rules have no connection to the outside
world. When you pass GO in Monopoly you get $200. That is not connected to any
real event in the real world. There is no GO in the real world, and there is no
$200 when you pass a certain point. But when you play Monopoly you quite willingly
accept that rule. So what was happening, I think, is that people were giving themselves
over to their own perceived internal rules that were created around the market.
But they didn't really have any kind of major connection to the actual world.
LEWIS: The markets do have their own rules, and whether it is a game or not didn't
change that there were more participants in CNBC and a lot of other publications
such as Thestreet.com. These publications arose because a lot more people were
taking control of their financial future, and a lot of people didn't have a choice
about it. They didn't have a defined benefit plan and they had to figure out how
they were going to retire. It's pretty simple. Maybe I'm a Pollyanna about this,
but I think the public is not as irrational about the market. The market is irrational.
The public can hold two thoughts in its head at the same time. I will behave in
such a way as a consumer, but as an investor I can behave in an entirely different
way. Especially when the message that they've been told is: don't worry about
the dip, buy on the dip, we'll recover from this. All of a sudden, last April,
that message didn't work anymore. When you saw that the talking heads--who were
always there to assure you that this dip was a buying opportunity--had suddenly
gone to the ground, people stopped buying. Also, I think there was an approximate
cause for the dip last March. People were getting the heebie-jeebies about Microsoft
earnings. That was the first crack and it proceeded from there.
BYRON: I would say that there are two different markets here: a consumer market
place and a financial marketplace. They are separate, and they actually function
by diametrically opposed rules. But when you hear people talking about how we
are in a different kind of environment than we were before, with these squishy
numbers that nobody could really comfortably interpret and project out, they're
talking about the process by which the rules of one market have leaked into another
market and begun to affect it. It works like this in the consumer market: you
buy cheap and sell expensive. You look for bargains. Nobody goes into Saks and
looks for the most expensive cashmere sweater and says to the salesperson, " I'll
come back tomorrow and buy it if it's more expensive." But that is, in fact, how
the financial market works. The majority of people are only comfortable buying
when stocks are going up. They believe the way to make money is to buy when stocks
are high and heading higher. It's the philosophy of momentum trading that William
O'Neal, the publisher of Investor's Business Daily, made a fortune promulgating.
It began in the Eighties and reached a critical mass in the Nineties with the
Internet, and the ability of millions and millions of people to do what everyone
else was doing. Momentum trading created the extraordinary economic valuation
levels that we've reached. This went on for so many years that an entire generation
of people entered adulthood and reached early middle age never having known anything
but reward from this process. This created a process in which the National Savings
Rate eroded from 6% of disposable income to nothing today. It's a negative National
Savings Rate. And it got that way because people think, "Why should I save? The
market is saving for me." Now this buy-high, sell-higher philosophy has reached
into the real market of the world. It's no longer easy to get your hands on the
money, the actual cash that's evaporated into this bubble. We have lost over 4
trillion dollars here.
SUROWIECKI: This $4 trillion number is bandied about so much, but the $4 trillion
includes all those companies that you were so articulate in dismantling--all those
companies that were worth $10 and $15 billion. So to say that $4 trillion of wealth
has vanished is not quite as if $4 trillion disappeared from savings accounts,
right?
BYRON: This was national savings and it did disappear. This is capital that we're
talking about, most of which was in the form of unregistered stock. That was the
80% owned by the insiders, when the 20% is sold to the public in the IPO. Within
months of the beginning of the IPO boom, every major bank in this country was
making loans against unregistered stock. I happen to live up in Fairfield County,
CT. I can assure you that at the peak of this boom, no builder in the area would
start a home with less than four bays for their cars and 7,000 square feet of
living space. That's all over now. Nothing is moving there and the reason is,
you can't get a loan on your unregistered stock anymore. They can't sell the homes.
So the reality of it is--yes, that money did disappear.
LEWIS: One theory that I have--and it's a crackpot theory--is that magazines and
newspapers got so big, and there was so much revenue coming in and so many inches
to fill, that there were people who were writing stories who shouldn't have been
writing and editing stories. Basic reporting went out the window. We were using
secondary sources such as Wall Street analysts with an ax to grind, and as the
primary sources we were using the market research people, investment bankers,
and venture capitalists who were in the pockets of the companies. You couldn't
go out and say, "Where are the customers, where are the suppliers?" and get all
the information you would normally try to get to report a full business story.
So you were in a bind.
PART
THREE: The Audience Challenges
AUDIENCE QUESTION: Aren't you guys downplaying the incredible greed of the public?
LEWIS: In a boom like this, like in the Twenties and the Sixties go-go market,
everybody and his brother was in the market, and every barber and shoe shine
boy had a tip. The press picks up on the tone of the public and feeds it back.
I remember being extremely skeptical about all this stuff because I covered
technology for so long. I believed in no miracles. Then things just took off
in the late Nineties and my skepticism didn't ring true. Maybe we're guilty
of getting caught up in the moment. You just say, well, maybe I was wrong because
look--Amazon is at $400 a share.
AUDIENCE QUESTION: I'm a professional investor, I'm not a reporter. As a professional
investor I would say CNBC is pure commentary and it has about the impact that
the commentary at ESPN does before the game.
SUROWIECKI: CNBC, if you think about it, is the equivalent of ESPN. The virtue
of ESPN is that the coverage of the game does not influence the game. But ESPN
wants every game to be close, and that's what makes a game interesting. It wants
every game to have momentum; it wants every game to be exciting and to have
big ups and big downs. The question is, can you cover the market on a day-to-day
basis?
LEWIS: I no longer work for them so I'm not going to be a stool pigeon. CNBC
has made a few mistakes. Take away your cushy weekly or biweekly deadlines and
try to cover the market with a minute-to-minute focus. It's impossible.
AUDIENCE QUESTION: How do you think the media are really handling the comparison
between Main Street and Wall Street? Have we become pawns of Wall Street?
LEWIS: There's a certain reality to it that I think is being covered, which
is that as a result of this long bull market, management of every company is
extremely aggressive about keeping its stock price up. It seems like a futile
effort right now. I think you're on to something: that the reporting of the
"real" economy has fallen into the same market-driven trap as we had with the
dot-com economy. The CEOs absolutely believe that the only measure is stock
price.
GLADWELL: I think what's happened in this kind of market mania is that people
have focused on the idea that profits and stock prices are the most important
aspect of a company. In fact, there are a lot of other things that are more
interesting. The most interesting thing about Ford is actually not its stock
price or its earnings. It's possible to try and change the dialogue and to ask
different sorts of questions.
AUDIENCE QUESTION: Do you think the media is responsible for propagating that
notion?
LEWIS: Yes. In the last few years the metric that became paramount was stock
price and earnings momentum. It was nice to write about an interesting business
or an interesting invention, but at the end of the day that was the score. CNBC
is not the only outlet that is guilty of making that the metric so vital. There's
an audience out there and clearly that's the simplest way to keep score. Why
do we have the Fortune 500?
SUROWIECKI: I disagree. I feel like this really goes back to the Eighties. In
some ways I don't think it's a bad thing. A lot of the reinvention of American
industry and American business came as a result of a focus on shareholder value.
It was really exaggerated in the Nineties because the metrics became so insane
and the evaluations became impossible to live up to. It's clear in the fact
that people cut back long before there's any real sign of a downturn. At the
same time I think that if anyone's responsible for it, it's shareholders. I
wouldn't hold us responsible for it.
AUDIENCE REACTION: It's Greenspan's fault for becoming much more public. He
became transparent, and I think that was the big mistake. He should have remained
opaque and kept people guessing.
BYRON: But really guys, isn't this the American way? I mean, we take a public
icon, we lift him to completely unjustified levels and then we tear him apart,
that's what I think has happened to Mr. Greenspan.
AUDIENCE REACTION: He was never responsible for 90% of what we gave him credit
for. He's probably not responsible for what we've been blaming him for now.
Do you think that we did the same to the stocks? We lifted them to untold heights
and now we're beating them down.
BYRON: First of all, the stock market isn't a person. Alan Greenspan was the
nearest we ever got to a financial bureaucrat superstar. In the Presidential
debates (I forgot which one) the moderator asked both Gore and Bush: if you
had a financial crisis, what would be the first thing you'd do? And both of
them said the same thing, "Well, I'd ask Alan Greenspan what to do." I think
it's just human nature that we've turned on him now. We need a dog to kick and
he's convenient. He was identified with all the successes. Why shouldn't he
take the blame for the fall?
AUDIENCE QUESTION: The Internet bubble coincided with a huge bubble in gambling.
What would you say about that?
GLADWELL: The book I've written is largely about this phenomenon. It's called
The Tipping Point. I think you're absolutely right, and I think one of
the defining features of the age that we live in is the notion that we have
these kinds of self-contained and self-generating epidemics which are not linked
to and prompted by formal top-down mechanisms. The epidemic of school shootings,
for example--no one ever said to kids that this was an appropriate way to act.
In fact, the message of all the media coverage is that this is a terrible, terrible
thing. But the more we tell kids this is a terrible thing, the more they go
out and shoot other kids. Teen smoking exploded in the mid-Nineties, despite
the fact at no time in human history have there been more voices telling teens
not to smoke. There is something fundamentally contrary and independent about
this generation of social epidemics. So I think you're absolutely right, and
we need to look well beyond the influence of the media in explaining these bubbles
of enthusiasm.
LEWIS: The enthusiasm is justified. The Internet really is a fundamental innovation.
It's a real change in the economy and we have no idea where it's going to land.
But we couldn't sell the story to the public if they didn't grasp that there
was something real happening when they went to Amazon.com to buy books, or they
started trading online, or they started going to CBS MarketWatch to get their
financial news. That behavior is there, and it's not going to go away. The world
has changed. In some degree we reflect something that is really happening there,
and then the exaggeration machine takes over. Now, the exaggeration machine
is going into reverse gear. So we'll wind up in equilibrium at some point, I
hope.
PART FOUR: From Now
On SUROWIECKI: What is business journalism's role,
going forward?
LEWIS: In my short span, business reporters have gone from being the dregs of
the newsroom to the stars. When I was getting into the business, Woodward and
Bernstein were the inspiration. Business reporters attained glamour in the Nineties.
It's extremely odd and ill-fitting, so maybe a reversion to the norm would be
a healthy thing. There is a chilling experience here. You see that there are
consequences of the way you report and the way you edit. It takes a lot, especially
in major media, to stand up and say: I think the big trend story is bullshit.
But we should do it early and often.
BYRON: I would totally agree with that. I'd just simply add that I don't like
to think of it as business journalism. It's like a hyphenated name. It's like
lucrative law practice or welfare--cheap. It's just journalism that happens
to deal with financial numbers instead of vote tallies and ball scores. I think
that the main thing that we need to keep really focused on is not what is good
for readers, but what feels right to us as writers. If it feels that the whole
world is out of step, then say that. If we end up being wrong, then that's life.
But the whole process gets diminished when we start pulling punches because
this might affect the stock price, or the market is really wavering right now
and we don't want to anything to tip it over. We shouldn't care about those
things. We should just care about whether our story is something we want to
go back and look at five years from now and be comfortable with.
GLADWELL: I'd like to make a call for more nerdiness in journalism. I happen
to be a car nut and I've been a subscriber to Car and Driver for the
last 25 years and never in the history of Car and Driver has the stock
price of an automobile maker been mentioned. Nor have the earnings or the profits.
Yet if you read Car and Driver over the last 25 years you would actually
know more about the financial prospects of the automobile industry than anyone
else. That's a wonderful model. I think that we all need to be nerds again and
write about stuff in a very involved way and educate our readers. In the end
we'll probably all be better off.
