Why I Increasingly Distrust Financial Reporting
By now, many of you will have read the personal financial confessional by NYTimes economics reporter Edmund Andrews. Andrews, in well-written, emotionally wrought detail, describes his journey through the real estate bubble, getting caught in the frenzy of easy money and no-doc loans, excess credit card debt, and a whole series of poorly thought out financial moves. As Andrews states, “…in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds.” I think the difference between Andrews and many buyers is that he admits this point; that although he was fully aware of the risks to the system and the shady practices of lenders, brokers, and appraisers; he thought that he could uniquely beat the odds.
The other difference of course is that Andrews is paid to research and write for the NYTimes on economically relevant topics including the housing bubble, loose credit issues, and the actions of the Federal Reserve. As a news junkie, I was familiar with Andrews’ byline and have generally thought his reporting to be solid. But the hubris involved in his financial decisions, and the compartmentalization between his private financial life and the unfolding financial collapse, makes me wonder if all financial reporting doesn’t suffer from this phenononon. I understand that Andrews is not a personal financial reporter and his work did not extend to personal financial advice; but during the course of being offered surprisingly easy access to credit, why did Andrews not think that if he could access loans on such a scanty financial basis, that millions of others could as well. That if the financial institutions were so lax with his case, applied across millions of households, this indicated peril for the whole industry. His inability to extrapolate from his own situation to the larger issue for the financial industry might have been one of the reasons, the collapse of Bear, Lehman, AIG, FNMA et al may have taken many off guard and seemed not to be contemplated by mainstream journalists.
As I read NYTimes piece, I found myself empathetic, although not sympathetic, to the overall story. Indeed, I shook my head as he outlined taking out large mortgage on a net paycheck of $2777 a month. The head shaking continued when he described the ongoing bills, for rental vacation places, new clothes, airplane tickets and Gap clothes in a severed from reality frenzy. But at the very end of the article, when I read the tagline and realized that this excerpt represented first serial rights from an upcoming book which the author will no doubt be promoting aggressively, did I think that we should consider some disclosure rules on industries that they cover. Similar to the way portfolio managers are required to disclose if they hold a stock when they speak about it on TV or Doctors and researchers are supposed to report if they received compensation from drug companies whose products they are testing, perhaps we should have disclosure of financial entanglements of economics reporters.
I do wonder how many financial reporters got caught up in the real estate bubble, and if they had mortgages with some of the failed mortgage brokers that were handing out piles of cash. Did this affect their coverage of the story? Did they miss the 800-pound gorilla in the room as they were calling their broker to arrange another home-equity loan? Are almost all of us, homo sapiens, not homo economici, biased with this hubris gene to think that uniquely we can avoid catastrophe? In the mean-time, I think my sodium intake has increased as I read the financial news with increasingly more shovels of salt.
see other articles at this week’s Carnival of Personal Finance
I was looking through the web for someone who made your point.
However, I think it’s more than just hubris – it shows a serious inummeracy and/or lack of intelligence among these reporters. What kind of background do some of these financial reporters have? We have to remember that if they were good at finance, they would be working in the field rather than reporting on it.
It’s not just reporters who lack an understanding of the investing basics. Many of those we think of as “experts” lack this. My view is that our understanding of how investing works today is primitive and the “experts” are causing big trouble by suggesting that they have far more of a handle on things than they really possess.
When you don’t know, you should say “I don’t know.”
When you are not sure, you should say “I’m not sure.”
When someone who disagrees with you makes a good point, you should say “that’s a good point.”
What I am proposing is viewed as “Controversial” by leaders in this field. My belief is that it is simple common sense.
Rob
IH, for reporters generally, yes, I would agree that it is a lack of basic understanding of the math. For Andrews specifically, I’m not sure, I get the sense it was more, that the industry is in peril, but that he thought he was a lesser fool and could get out before the last chair was taken, so to speak.
As for reporting, it used to be a profession where people went into it because they were passionate about the topic and could write really well. These days, unfortunately, only select sports reporters seem to fit into that category. Makes you wonder about the watchdog role of the fourth estate.
Rob, I think another problem is that “investment professionals” or “experts” all seem to tout the party line, kind of like the nutritionists that for years recommended margarine because that’s what their books told them to do.
I think part of the problem is that many people were not exposed to personal financial management either in their home, or at school; and thought that heavily leveraging; piling into real estate; taking out huge amounts of credit card and home equity loans were just the norm.
I am interested in your proposal to offer better advice through blogs, although I think bloggers should be subject to high ethical and disclosure standards as well.
Thank you for commenting.