Distinguishing Opinion from Analysis

At "A Dash" we have been exploring the question of how an intelligent individual investor might gain useful information from the media -- both print and broadcast -- and from the rich offerings of the Internet.

A main theme of our planned book is that a little knowledge can be a dangerous thing.  The average person, a consumer of this information, needs to understand the qualifications of the source.  The consumer must have enough knowledge and technical skill to decide how to interpret the commentary.

An important theme is that the democracy of the Internet and the hunger for content has diminished quality.

Background

A viewer watching CNBC today was offered a discussion on a possible bailout of Bond Insurance companies[no link yet].  The discussion, emphasizing whether such a bailout was desirable, included someone who is expert on analyzing individual companies and is now expanding to offering opinions on everything, the CNBC technology and media editor, and the go-to guy on the inner thinking of Wall Street.

Since we were intrigued by what this group might have to offer, we took CNBC off of the standard "mute" and TiVo'ed back to the discussion.

What we heard was the opinion of three people, all nice guys that we would enjoy having lunch with or chatting with over a drink after work.  It was opinion.  It leaned to the idea that government should allow the free market to prevail, that economics suggested that the chips should fall where they may, and that businesses and investors who made poor decisions should accept the consequences.

Who Knows What?

Let us suppose that one heard two different people talking about playing the violin.  Each described the emotion and passion of a performance, the feel for the music.  Both people "talked a good game."

Let us next take a further step.  Suppose each was asked something quite different -- asked actually to play!

There are many "pretenders" in financial commentary, something that we discussed in some detail a few months ago.  It is worth reading again.

Key Questions

There are several questions to ask.  The short list is as follows:

1. Was it clear that this was an "opinion" segment?  In mainstream media, opinion columns appear on an op-ed page, clearly identified as such.  A consumer is alerted.  Television and blogs alike highlight these opinions without such identification.
2. Was the presentation balanced?  The answer to this is a clear 'No."  We hesitate to make statements referring to things like "one learns this in (pick your subject) 101", since most people saying such things seem not to have taken Subject 101 themselves!  Our commentary is a bit different, based upon experience in teaching Poli Sci 101 at a major university.  The problem in the discussion is that the participants had no awareness of the role of government, something taken up in an early lecture.  Since we cannot do the entire class here, let us just make the major point.  Government engages in a "bailout" not to help the affected groups, but because of a threat to innocent parties -- collateral damage, if you will.  If the systemic risk is great enough, it is appropriate for government agencies to act.  They do so not because they are helping those who made mistakes, but in spite of it.
3. Did the information make clear that the opinions offered might not be predictive of actual government action? Once again, the answer is "No."  If one really understands the mission, norms, and motivations of various government agencies, it is clear that what will probably happen (and already has happened) is in direct conflict with the opinions offered.

Investor Relevance:  Normative versus Empirical Thinking

Abnormal Returns, always a great source for what is relevant in the financial blogosphere, sometimes provides a thoughtful article giving additional perspective on key information.  We found the discussion of positive and normative economic theory to be especially useful, and urge readers to check out the complete article.  What is stated about economic theory is equally true for political theory.

Investors should be most interested in what government agencies are likely to do, not in opinions about what someone on TV thinks they will do.

Our Take

The issue of the monoline insurance companies is a key question for markets, as we have noted.  The process of "solving" this problem seems very slow to market participants.  Daily trading reflects each twist and turn.

This problem will be addressed, either through private action or more aggressive moves by government agencies.  The reason is simple.  There is so much systemic risk.

Our opinion does not mean that specific companies or their investors will profit.  In fact, the solutions may involve major dilutions of interest.  Government is less interested in saving investors in the individual companies, but much more interested in stabilizing the economy and the markets.

Consumers of information must always distinguish between those who offer opinions about what they believe should happen, and what is actually likely to happen.

There are many applications of this principle where those with opinions have already been proven wrong, including Fed interest rate actions, the TAF facility, the stimulus package, changing conforming loan limits, and relief for individual homeowners.

These actions should be viewed collectively, not as individual policies.

Comments

[oldprof]

Mike -

The focus on the Buffett proposal was whether it "solved" the problem. Many observers noted that instead, it isolated the problem.

Whether the government should act on the CDO aspect, or whether private actors can and should do so, is the key question.

More on this in the future.

Thanks,

Jeff

[oldprof]

Turley-

Thanks for the very thoughtful comment. When economists are writing a popular and regular column, perhaps the temptation is for readership rather than data and analysis.

Some of these writers want to have a public policy effect, and make the best effort to do that. Some occasional contributors, like David Malpass, regularly include a lot of supporting data.

When doing a media spot, contributors are encouraged to be opinionated and make specific recommendations.

Meanwhile, there are plenty of good economics blogs, by thoughtful academics and former Fed types.

A stimulating question!

Jeff

[Mike C]

Fascinating developments with Buffett stepping in to essentially "solve the problem" with respect to the municipal bond side.

Seems to me this changes the whole equation with respect to any government plan to "bail out" the insurers. Is there any compelling government interest at all with the CDO and other miscellaneous "toxic debt" if a private party is willing to step in and guarantee the government bonds?

[Turley Muller]

Jeff,
Great article as always.

Expert views on government bailouts, specifically the mortgage pool insurance- I, just like you said, almost always see and hear the opinion or normative economic side.

It seems its always a debate over moral hazard and teaching a lesson do that risk actually means risk. That's a given. But, the Fed's job is not to monitor and regulate moral hazard or behavior of organizations.

The Fed's mission is to promote price stability and full employment (GDP). The short-run the Fed seeks to make sure financial system flows and contain troubled areas so that it they don't manifest and spread through the whole system.

Like I think you were saying, we need more commentary on how the bond insurance affects the areas- specific indiustries that could see major job losses or basically "go away" - consumer spending (majority of GDP) - Investment (GDP)- inflation and interest rates - lenders - and so on.

If insurance affects access to capital then investment will suffer, thus less jobs meaning less consumer spending, and so on ..... I would think. Also, if assets held by financial institutions are insured with policies that the market has little faith in, then those financial institutions will have to borrow at a higher rate because of the risky assets so they will have to lend at a higher rate and then .. you know the rest and goes on and on..

I assume what we need to know is what other areas of the financial system and economy will be affected if no bailout. How severe? How far problems spread ? How long problems would they persist?

It's not about government protecting big business and wealthy investors, and if firms were greedy and should bear full responsibility and be punished.

Congress and other agencies need to get involved to enact regulation that would relieve pressure and make less probable that these issues will arise again.

MSM rarely has fact-based analysis, mostly belief based.

I have a question, Jeff why do even the distinguished experts focus on their opinion, take Paul Krugman, credentialed economist who only provides opinion. Is economics not a science?
Krugman describes himself as an economist, yet he is a philosopher, and so many more are too- normative economist. Everyone has an opinion- nearly infinite "what should happen", but a fact can only represent one "what is"

The problem I see with blogs all the time is that authors sometimes don't even attempt to add supporting evidence to their theories. If one is to give an opinion, at least provide fact-based logic that strengthens the argument.