One fundamental lesson from the current financial crisis is to stop shutting out dissenting, contrarian voices
By VIKRAM KHANNA 20 March 2009
At a recent seminar for visiting journalists from Asia on the timely topic of ‘covering the economic crisis,’ three distinguished practitioners from different parts of the world - China, India and Europe - hit a strikingly common chord: The mainstream media in each of these places was, and still is, behind the curve, they said. Ditto, it must be said, for the Singapore media.
Here, as everywhere else, the media was as surprised as almost everybody at the virulence and depth of the financial mayhem unleashed upon the world over the last 12 months.
John Burton of the Financial Times pointed out that the mainstream media in the West was at least a couple of weeks behind in its assessment of the seriousness of the financial crisis.
Niu Tiehang of Peking University’s China Financial Policy Centre and a former journalist with China’s Economic Daily said that the state-controlled media was likewise slow to pick up on the devastating impact of the collapse in global trade on the economy of China’s coastal provinces.
And Andy Mukerjee of Economic Times TV in India suggested that the Indian media is still in a state of semi-denial about the effects of the crisis on the Indian economy, running vague, catch-all headlines such as ‘global cues negative’, (presumably meaning ‘the global economy looks bad’), without bothering to disaggregate.
Sheer intellectual laziness aside, part of the reason for the media lagging behind the reality on the ground is that financial journalists to a large extent, themselves fed on ‘mainstream’ sources of information: research reports put out by banks and broking houses, for instance (which are unlikely to suggest that their banks or brokerages are in danger of collapsing), or studies from official bodies such as the IMF, the World Bank, governments and think tanks, which, as their forecasts of a year ago show, have also been behind the curve in diagnosing the crisis.
The views of independent observers, in places such as the blogosphere, as well as authors of books who take a radically contrarian view, command little space in the mainstream media.
One of the less well-known (or at least, less well-acknowledged) facts about this economic crisis was that it was clearly predicted, albeit by a small minority of economists and analysts to whom not enough people - either in the media, or outside - paid much attention.
Not all these prescient observers were on the fringe: some were decidedly mainstream academics and practitioners.
Among the most celebrated is Nouriel Roubini of New York University’s Stern School of Business. Prof Roubini, who is now hailed as a prophet and frequently appears on talk shows, saw the crisis coming with uncanny clarity. On Feb 27, he wrote a column on his Web portal, RGE Monitor, entitled ‘Economic and Financial Hard Landing Ahead’, in which he pointed to the bursting of the US housing bubble, how easing by the US Federal Reserve would not prevent a recession and how the rest of the world could not decouple from a US hard landing.
On Feb 5, 2008, in a now famous entry, ‘The Rising Risk of a Systemic Financial Meltdown: the 12 Steps to Financial Disaster’, Prof Roubini set out with stunning prescience, step by step, almost exactly what would happen in the months ahead: the decline of housing prices, the losses on sub-prime mortgages spreading across the mortgage spectrum; increasing defaults on other forms of consumer credit; rising writedowns by financial institutions, the possible bankruptcy of regional, and even national, banks; a wave of corporate defaults; severe distress among hedge funds, investment banks and other parts of the ‘shadow banking system’, a sharp decline in stock markets, and more.
But he was not the only one, and not even the earliest. Back in 2005, International Monetary Fund chief economist Raghuram Rajan gave a speech where he suggested that compensation systems in western financial institutions were custom-tailored to promote reckless risk-taking, which created a possibility of a financial blowout.
In June 2007, The Bank of International Settlements - the central bankers’ central bank - warned of the dangers of excessively loose credit, noting pointedly that the Great Depression and other severe crises - including the Asian crisis of 1997 - were always preceded by an era of exuberance.
China too, had its astute observers. Mr. Niu drew attention to the work of an analyst, Song Hongbin, who had worked at Fannie Mae in the US and predicted the collapse of major financial institutions well in advance. Unable to have access to the mainstream media in China, his work only appeared on the Web portal, Sina.com.
Then, there were books which sounded early warning signals. One, published in 2006 entitled ‘The Oracle Behind the Curtain’ by E Ray Canterbury, warned of the dangers of the fundamentalist free-market ideology of the then Fed chairman Alan Greenspan, who at the time was at the peak of his prowess and widely feted as ‘the maestro’. Mr. Canterbury pointed out that the explosion of credit and lack of financial market regulation under Mr. Greenspan would have dire consequences down the road.
Earlier this month, BT ran a feature by Edward Chancellor looking back at the book, ‘Financial Armageddon’, by Michael Panzner, published in early 2007, which predicted, again with uncanny precision, among other things, the failure of the US mortgage giants, Fannie Mae and Freddie Mac, the collapse of bond insurers, and even the largest banks. ‘It turns out that this crisis wasn’t just perfectly predictable,’ said Mr. Chancellor. ‘It was perfectly predicted.’
Even earlier, in 2003, the author and former analyst Richard Duncan had warned in his book, ‘The Dollar Crisis: Causes, Consequences, Cures’, (which Mr. Burton mentioned at the journalism seminar) that the US economy would inevitably face a time of reckoning for years of payment imbalances and credit excesses - which would eventually lead to a crisis for the US dollar and be devastating for the world.
In August 2003, Mr. Duncan had, in fact, said in a talk in Singapore, organised by the Singapore Institute of Management, that the world economy was doomed to crash in 5-10 years, leading to a severe and protracted slump.
Apart from prominent economists, bloggers, and authors, there were even people in the thick of the action during the boom years, who had raised red flags.
Ed Gramlich, a Federal Reserve governor, warned in 2000 that aggressive mortgage lenders were luring people into taking mortgages they could not afford, and urged tighter regulation. Housing advocacy groups also called for action against such unscrupulous practices. Mr. Greenspan, an avowed believer in ‘self regulation’, ignored such views.
In 2004, the US financial market regulator, the Securities and Exchange Commission, after furious lobbying by big US brokerage firms, reversed a long-standing rule to allow them to significantly increase their leverage from 8 to 1 to 50 to 1, leading to hundreds of billions of dollars being freed up for investment in risky financial assets. It was presumed that the brokerages would monitor their exposures through ‘self regulation’, their computer models would determine their risk-levels.
However, one voice, that of software consultant Leonard D Bole, loudly disagreed, arguing that the firms’ computer software would never be able to predict certain kinds of market turmoil. His letter to the SEC, sent in January 2004, never got a response.
And then, of course, there was the now celebrated whistleblower Harry Markopoulous, the derivatives specialist, who wrote a detailed letter to the SEC in 2005 explaining why the then-revered money manager Bernard Madoff was, under a ‘highly likely’ scenario, ‘running the world’s largest Ponzi scheme’. ‘There are too many red flags to ignore,’ he wrote, urging the SEC to take action. But it was Mr. Markopoulous who was ignored. It turned out that he was totally correct; some four years later, after hundreds of investors had lost billions of dollars, Madoff, was convicted as a Ponzi-artist and jailed.
The intriguing question, of course, is why so many people who rang alarm bells early on were not heeded. Part of the explanation could be that some of the big institutions of the financial world, such as the SEC and perhaps even the Fed, were, to an extent, captives of the financial industry. As some observers have pointedly noted, officials from regulatory institutions have often moved on to flourishing careers on Wall Street.
Another explanation could lie in the inherent tendency among investment professionals and financial journalists - and computer models as well - to disregard tail-risk, and especially, worst-case scenarios. Much of the time, we see only what we want to see and believe only what we want to believe.
One of the fundamental lessons of this financial crisis is the importance of accommodating, and indeed, encouraging, the diversity of opinion and of not shutting out the dissenting, contrarian voices, whatever their distance from the mainstream world-view.
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Warning sounded but no one heeded
One fundamental lesson from the current financial crisis is to stop shutting out dissenting, contrarian voices
By VIKRAM KHANNA
20 March 2009
At a recent seminar for visiting journalists from Asia on the timely topic of ‘covering the economic crisis,’ three distinguished practitioners from different parts of the world - China, India and Europe - hit a strikingly common chord: The mainstream media in each of these places was, and still is, behind the curve, they said. Ditto, it must be said, for the Singapore media.
Here, as everywhere else, the media was as surprised as almost everybody at the virulence and depth of the financial mayhem unleashed upon the world over the last 12 months.
John Burton of the Financial Times pointed out that the mainstream media in the West was at least a couple of weeks behind in its assessment of the seriousness of the financial crisis.
Niu Tiehang of Peking University’s China Financial Policy Centre and a former journalist with China’s Economic Daily said that the state-controlled media was likewise slow to pick up on the devastating impact of the collapse in global trade on the economy of China’s coastal provinces.
And Andy Mukerjee of Economic Times TV in India suggested that the Indian media is still in a state of semi-denial about the effects of the crisis on the Indian economy, running vague, catch-all headlines such as ‘global cues negative’, (presumably meaning ‘the global economy looks bad’), without bothering to disaggregate.
Sheer intellectual laziness aside, part of the reason for the media lagging behind the reality on the ground is that financial journalists to a large extent, themselves fed on ‘mainstream’ sources of information: research reports put out by banks and broking houses, for instance (which are unlikely to suggest that their banks or brokerages are in danger of collapsing), or studies from official bodies such as the IMF, the World Bank, governments and think tanks, which, as their forecasts of a year ago show, have also been behind the curve in diagnosing the crisis.
The views of independent observers, in places such as the blogosphere, as well as authors of books who take a radically contrarian view, command little space in the mainstream media.
One of the less well-known (or at least, less well-acknowledged) facts about this economic crisis was that it was clearly predicted, albeit by a small minority of economists and analysts to whom not enough people - either in the media, or outside - paid much attention.
Not all these prescient observers were on the fringe: some were decidedly mainstream academics and practitioners.
Among the most celebrated is Nouriel Roubini of New York University’s Stern School of Business. Prof Roubini, who is now hailed as a prophet and frequently appears on talk shows, saw the crisis coming with uncanny clarity. On Feb 27, he wrote a column on his Web portal, RGE Monitor, entitled ‘Economic and Financial Hard Landing Ahead’, in which he pointed to the bursting of the US housing bubble, how easing by the US Federal Reserve would not prevent a recession and how the rest of the world could not decouple from a US hard landing.
On Feb 5, 2008, in a now famous entry, ‘The Rising Risk of a Systemic Financial Meltdown: the 12 Steps to Financial Disaster’, Prof Roubini set out with stunning prescience, step by step, almost exactly what would happen in the months ahead: the decline of housing prices, the losses on sub-prime mortgages spreading across the mortgage spectrum; increasing defaults on other forms of consumer credit; rising writedowns by financial institutions, the possible bankruptcy of regional, and even national, banks; a wave of corporate defaults; severe distress among hedge funds, investment banks and other parts of the ‘shadow banking system’, a sharp decline in stock markets, and more.
But he was not the only one, and not even the earliest. Back in 2005, International Monetary Fund chief economist Raghuram Rajan gave a speech where he suggested that compensation systems in western financial institutions were custom-tailored to promote reckless risk-taking, which created a possibility of a financial blowout.
In June 2007, The Bank of International Settlements - the central bankers’ central bank - warned of the dangers of excessively loose credit, noting pointedly that the Great Depression and other severe crises - including the Asian crisis of 1997 - were always preceded by an era of exuberance.
China too, had its astute observers. Mr. Niu drew attention to the work of an analyst, Song Hongbin, who had worked at Fannie Mae in the US and predicted the collapse of major financial institutions well in advance. Unable to have access to the mainstream media in China, his work only appeared on the Web portal, Sina.com.
Then, there were books which sounded early warning signals. One, published in 2006 entitled ‘The Oracle Behind the Curtain’ by E Ray Canterbury, warned of the dangers of the fundamentalist free-market ideology of the then Fed chairman Alan Greenspan, who at the time was at the peak of his prowess and widely feted as ‘the maestro’. Mr. Canterbury pointed out that the explosion of credit and lack of financial market regulation under Mr. Greenspan would have dire consequences down the road.
Earlier this month, BT ran a feature by Edward Chancellor looking back at the book, ‘Financial Armageddon’, by Michael Panzner, published in early 2007, which predicted, again with uncanny precision, among other things, the failure of the US mortgage giants, Fannie Mae and Freddie Mac, the collapse of bond insurers, and even the largest banks. ‘It turns out that this crisis wasn’t just perfectly predictable,’ said Mr. Chancellor. ‘It was perfectly predicted.’
Even earlier, in 2003, the author and former analyst Richard Duncan had warned in his book, ‘The Dollar Crisis: Causes, Consequences, Cures’, (which Mr. Burton mentioned at the journalism seminar) that the US economy would inevitably face a time of reckoning for years of payment imbalances and credit excesses - which would eventually lead to a crisis for the US dollar and be devastating for the world.
In August 2003, Mr. Duncan had, in fact, said in a talk in Singapore, organised by the Singapore Institute of Management, that the world economy was doomed to crash in 5-10 years, leading to a severe and protracted slump.
Apart from prominent economists, bloggers, and authors, there were even people in the thick of the action during the boom years, who had raised red flags.
Ed Gramlich, a Federal Reserve governor, warned in 2000 that aggressive mortgage lenders were luring people into taking mortgages they could not afford, and urged tighter regulation. Housing advocacy groups also called for action against such unscrupulous practices. Mr. Greenspan, an avowed believer in ‘self regulation’, ignored such views.
In 2004, the US financial market regulator, the Securities and Exchange Commission, after furious lobbying by big US brokerage firms, reversed a long-standing rule to allow them to significantly increase their leverage from 8 to 1 to 50 to 1, leading to hundreds of billions of dollars being freed up for investment in risky financial assets. It was presumed that the brokerages would monitor their exposures through ‘self regulation’, their computer models would determine their risk-levels.
However, one voice, that of software consultant Leonard D Bole, loudly disagreed, arguing that the firms’ computer software would never be able to predict certain kinds of market turmoil. His letter to the SEC, sent in January 2004, never got a response.
And then, of course, there was the now celebrated whistleblower Harry Markopoulous, the derivatives specialist, who wrote a detailed letter to the SEC in 2005 explaining why the then-revered money manager Bernard Madoff was, under a ‘highly likely’ scenario, ‘running the world’s largest Ponzi scheme’. ‘There are too many red flags to ignore,’ he wrote, urging the SEC to take action. But it was Mr. Markopoulous who was ignored. It turned out that he was totally correct; some four years later, after hundreds of investors had lost billions of dollars, Madoff, was convicted as a Ponzi-artist and jailed.
The intriguing question, of course, is why so many people who rang alarm bells early on were not heeded. Part of the explanation could be that some of the big institutions of the financial world, such as the SEC and perhaps even the Fed, were, to an extent, captives of the financial industry. As some observers have pointedly noted, officials from regulatory institutions have often moved on to flourishing careers on Wall Street.
Another explanation could lie in the inherent tendency among investment professionals and financial journalists - and computer models as well - to disregard tail-risk, and especially, worst-case scenarios. Much of the time, we see only what we want to see and believe only what we want to believe.
One of the fundamental lessons of this financial crisis is the importance of accommodating, and indeed, encouraging, the diversity of opinion and of not shutting out the dissenting, contrarian voices, whatever their distance from the mainstream world-view.
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