Of Groupthink, Financial Bubbles, and Lance Armstrong

Monday'sincluded a fine column by David Carr, taking the mainstream sports media to task as not-to-silent partners in the selling of the Lance Armstrong legend.
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Lance Armstrong got away with ringleading what now looks like a vast doping conspiracy, in part because the sports media refused to investigate what was right under their noses. Why? Because they were too invested in the heroic image that congealed around the Tour de France winner. In much the same way, groupthink in the financial media has repeatedly led our most prominent journalists to valorize hucksters and ignore scandals until they blow up into full-scale catastrophes.

Monday's New York Times included a fine column by David Carr, taking the mainstream sports media to task as not-to-silent partners in the selling of the Lance Armstrong legend. Carr gives the sports desk a good spanking. But the problem he describes is actually much bigger, extending deep into the business and economic coverage that is arguably the most critically important information we get from the media nowadays.

Let's review a bit of history. Back in the late 1990s, the dot.com bubble, financial deregulation, and accounting scandals at high-flying companies like Enron and Worldcom combined to generate a house of cards that collapsed early in the following decade, taking the economy with it. Much of this was quite foreseeable, and indeed was flagged by many out-of-the-mainstream journalists and economists. But not by the corporate business press, which fell heavily for the line, propagated by Federal Reserve Chair Alan Greenspan among others, that we now lived in a "new economy" where the old ways of valuing companies no longer applied. Fortune magazine, for example, named Enron "America's Most Innovative Company" six years in a row.

Hard to understand in retrospect, these derelictions made total sense at the time. As Carr explains in the slightly different context of Armstrong and big-time bicycle:

There was a heroic narrative to be nurtured, and mainstream reporters pretty much stuck to the script -- either because they were invested in the legend or were worried about maintaining access to one of the most important figures in sports.

A legend, he might have added, that the media helped create. In a not dissimilar manner did the business press tout the story of the "new economy" and turn hacks like Enron CEO Ken Lay into "maverick" symbols of American success.

Rather than learn their lesson, the business press fell into the same trap less than a decade later. Prominent reporters largely bought the line that there either was no housing bubble, or that (take your pick!) detecting the existence of one was too hard and therefore shouldn't be attempted. They failed to comprehend the dangerous levels of risk being spread by complex mortgage-backed securities, preferring to believe what their most highly-placed sources told them: that spreading risk around the investor universe would somehow lower the level of risk for everyone. In fact, it created a contagion.

Perhaps the most delicious example of this refusal to grapple with reality was a column that the bestselling and much-lauded Michael Lewis wrote for Bloomberg.com in January 2007, reporting from the annual World Economic Forum junket in Davos, Switzerland. Scoffing at the idea that the markets may be mispricing some forms of risk, or that financial derivatives might have inherent dangers, Lewis blandly concluded, "The most striking thing about the growing derivatives markets is the stability that has come with them."

Lewis was just coming off the success of his inspirational football book, The Blind Side. Rather than being taken down a peg as a result of his embarrassing Bloomberg column, however, he parlayed the subsequent crash of the housing markets and much of Wall Street into another inspirational bestseller, The Big Short, which celebrated a group of short-sellers who had managed to profit from the disaster. The book also helped Lewis to cover his own tracks, implying strongly at every turn that predicting a crash took sheer genius of the kind only his subjects possessed. In fact, plenty of economists -- Dean Baker at the Center for Economic and Policy Research, for one -- had been warning for years and as loudly as possible about the overextended housing market. The business press, perhaps for the reasons Carr enumerates, simply weren't listening.

In somewhat the same way, the Armstrong doping story festered for years, kept alive by a small group of non-journalists and cycling enthusiasts, notably the team behind NYVelocity, a racing blog. Carr offers this telling quote from Betsy Andreu, the wife of a former Armstrong teammate:

Not every single person in the mainstream media bought the [Armstrong myth], many did good work, but many just went along out of fear or self-interest. The beauty of NYVelocity is that they knew the sport, knew the reality, and they were not beholden to any advertisers and the powers in the sport. They weren't afraid to print the truth.

Much of the subsequent coverage in the corporate sports media -- the details of the doping ring, the actions taken against Armstrong, etc. -- should be read with a large grain of salt. These are the same publications, and in many cases the same writers and editors, who treated the allegations of Armstrong's rule-breaking as a non-story for years. The same, of course, is true of Michael Lewis and his fellow big-foot financial journalists.

In February 2009, when the world was still processing the shock of the Wall Street catastrophe, the Columbia Journalism Review ran a story, titled "No Prizes For Post-Mortems," by two veteran financial reporters, Phillip L. Zweig and Stephen P. Pizzo. Noting the plethora of stories reporting the collapse as it happened and then retracing the history that led up to it, Zweig and Pizzo wondered where these intrepid reporters were during the years when the crisis was brewing.

Their post-mortems with their condemnations of the failures of others -- regulators, bankers, politicians corrupted by industry favors -- to our ears ring hollow since they invariably fail to explore even the possibility that the business press itself failed in its main job: to adequately warn the public of the abuses and dangers mounting on its main beats. In our opinion, credit standards over the last decade deteriorated to disastrous levels at least in part because of the decline in journalistic standards over the same period.

The title of Zweig and Pizzo's article suggested strongly that perhaps some categories of the Pulitzer Prizes should not have been given out in 2009. The post-mortems, however thorough and well-researched, didn't make up in any way for the press's failure to take an interest when the largest speculative bubble in history was putting the global economy in harm's way. More than that, the reporters and editors who missed the boat deserved a generous measure of blame for the disaster themselves.

Instead, the Pulitzer committee handed its Public Service prize to the New York Times "for its comprehensive coverage of the economic meltdown of 2008." Worse, the following year the Pulitzer for Investigative Reporting went to a McClatchy Newspapers team, "for their examination of the nation's financial collapse and notably on the involvement of Goldman Sachs" -- never mind that by 2010 this was, in financial markets time, the equivalent of archeology. Useful excavation, certainly, but nothing like the "beauty of NYVelocity" and its pursuit of Lance Armstrong.

What needs to be underscored, however, is not the press's negligence so much as its active involvement in the creation of disasters like the "new economy" delusion, the housing bubble, and the corruption of competitive cycling. Carr quotes Andy Shen, one of the founders of NYVelocity:

Bike racing is a niche sport, and then suddenly someone like Armstrong comes along and makes it 10 times bigger and no one wanted to be the one who went after him. Everyone in the industry depended on him or was afraid of him.

But the media didn't just depend on or fear him. Lance Armstrong was their Frankenstein, boosted to superstardom by a sports media always looking for a new hero to tout and another "niche sport" to pump up into the next big generator of advertising dollars. Likewise, the financial media boosted Enron and the dot.com bubble, the "democratization of credit" supposedly underlying the housing boom, and the alleged genius of the Wall Street rocket scientists who facilitated the derivatives-induced gambling mania of the pre-crash era. They did it to goose some sexiness out of what's essentially a dry and unglamorous business -- banking and business. And they did it to sell the public on the continuing dynamism and creativity of the capitalist system, a notion they believed because their sources told them it was so.

The business and financial media will continue to boost heroes until they're revealed to be otherwise. And they'll continue touting the next big thing until the emperor is shown to have no clothes. It's often noted that very few of the people who championed deregulation and were asleep at the switch when the housing bubble was collapsing, have suffered any consequences for either their actions or inaction. Fed Chair Ben Bernanke and then-New York Fed President Tim Geithner still effectively steer the economy, their notions of how to detect and forestall a financial crisis essentially unchanged. Former Sen. Phil Gramm, the Texas Republican who championed deregulation more than almost anyone in Washington in the 1990s and whose wife was Enron's regulator at the Commodity Futures Trading Commission, moved on to a sinecure with Swiss bank UBS, from which he recently retired with full honors.

Likewise in the business press. Michael Lewis continues to be one of the most admired nonfiction writers in America. Prominent columnists like the Times' Andrew Ross Sorkin - who never showed much awareness that the buyout frenzy of the mid-2000s, which he turned into such eagerly devoured copy, was built on the financial equivalent of sand - continue in their perches as if nothing had ever gone wrong.

So don't bet on it not happening again. Take the housing market: Is it rebounding? Or can we expect more catastrophes as private equity and other financial interests continue seeking out now ways to speculate on the floundering sector? Here's a piece from the Wall Street Journal last month, assuring us that "Housing Market Displays New Vigor as Prices Rise." Or, you can check out this, from the scrappy newsletter CounterPunch and titled 'The Housing Market's 'Phantom Inventory.'"

Judge for yourself. But remember that there's no such thing as an objective media.

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