Reviewing the Media Pundits: Two Views of the Fed

One of our themes at "A Dash" is the array of challenges to the individual investor.  Interpreting market commentary is one of the most important.  While our readers understand the blogosphere, the influential print media remain far more important.

The MSM articles do not have any comments, so readers are on their own to spot any problems.  To illustrate this, we will contrast today's article by New York Times columnist Gretchen Morgenson with a recent piece by Bloomberg's John M. Berry.

Morgenson on "Trash for Treasuries"

Regional printing has made it possible for people all over the country to enjoy a hard copy of the New York Times with morning coffee.  Our Thursday and Friday editions (during our West coast trip) were printed in Seattle, and today's, delivered at our door, was printed in Chicago.  Many individual investors look to their business coverage.

One of our favorite sources is Pulitzer Prize-winning columnist Gretchen Morgenson.  Her perspective is clear from her background -- history, English, journalism, and a record with publications that make difficult topics clear for average investors.  On most occasions, she does this very well.

Her column today includes all of the hallmarks of good journalism.  She has plenty of sources -- a mortgage guy saying that the Fed is accepting questionable collateral, quotes from Fed officials on the dubious nature of securities ratings, and a pithy quote from the sassy and colorful Joan McCullough calling the Fed a "monetary bordello."  There is a source for every statement.  Every technical point of journalism is covered.

Her conclusion?  The Fed is risking taxpayer money on dubious securities and we might all be left holding the tab.

Her opinion?  "To be sure, crisis times call for creative measures. But as long as Wall Street is allowed to swap trash for Treasuries on the taxpayers’ dime, don’t try to tell me this horror show is over."

Our Analysis

We are disappointed that Morgenson missed the point so badly.  She has written an article where every piece of it is accurate, yet the conclusion is deceptive.

It is not the mission of the Fed to engage in policies with profit in mind, although the net effect of Fed actions does provide "profits" to the taxpayer each year.

The Fed mission is to address the twin goals of economic growth and price stability, while assuring stability in financial markets.

By writing a column that focuses completely on the risk to the taxpayer, without due attention to the Fed mission, she misleads her readers -- mostly average investors.  The colorful language about "trash" emphasizes this viewpoint.

An Alternative View from Berry

John M. Berry has long been recognized as an authority on the Fed, often with an inside glimpse of official thinking.

In a recent article, he makes several important points.  First, the nature of the Fed actions:

The Federal Reserve is supplying the financial system with more than $150 billion in cash, a liquidity cushion that has helped keep enough credit flowing to ensure the economy's growth.    

After another auction of term funds on May 19, the amount of cash from the Fed will probably top $175 billion. And if the system needs still more, Fed Chairman Ben S. Bernanke said in a May 13 speech, the Fed stands ready to supply it.

What has been the effect?  Berry cites some useful data, as follows:

...(T)he unprecedented amount of cash pumped into the system have helped the economy defy predictions of a recession.    

Recent data suggest the economy grew at about a 1 percent annual rate in the first quarter, slightly more than the 0.6 percent estimate released by the Bureau of Economic Analysis on April 30.    

And on May 13, Macroeconomic Advisers predicted that the tax-rebate checks now being sent to many households would spur consumer spending this quarter, boosting growth to 2.5 percent. Third-quarter growth would exceed 3 percent, the forecast said.

The specific lending effects?  More from Berry:

The Fed had no choice except to supply the liquidity that was no longer available in the market. Otherwise, even credit worthy households and businesses wouldn't have been able to borrow, and a recession would have been inevitable.    

Instead, over the 12 months ended in April, commercial and industrial loans rose 20.9 percent at banks, while home-equity loans climbed 9.9 percent and consumer loans increased 9.3 percent. Even other types of real-estate loans were up 6.7 percent over the period.

Our Take

The New York Times readership differs dramatically from that of Bloomberg.  A reader of Morgenson's piece alone may not understand the rationale for Fed actions, nor the important effects on the credit crunch and economic growth.

One of the biggest challenges for readers of opinion articles is to understand what has been left out.

The real story of the Fed initiatives was avoiding the "death spiral" of forced selling into illiquid markets.  Mainstream media have done a poor job in covering this issue.

It is so much easier to write something that will appeal to the "common man" in a way that emphasizes taxpayer risk.  Even if some loans go bad -- far from clear from the data -- the economic benefits dwarf any potential losses.

Investors who do not understand this are fighting the Fed, something we warned about in December.

             

Comments

[shrek]

So what are the fields with experts?

[Chris]

SI,

I recently came to the same conclusion about journalists. Any time they attempt analysis in a field that you are an expert in, it is so clear how poorly they understand the issues. Usually, a misleading, if not factually incorrect, article is the product of their work. I've stopped reading newspapers altogether and don't get me started on tv news.

I've realized that anyone who is not an expert on a topic has very little to offer me.

Chris

[oldprof]

Shrek - Nice to hear from you again! There certainly are some problems. But think about this. The "old style" Fed would have had only one blunt instrument to address them. The Bernanke Fed has been pretty creative.

I think they deserve a little more time to see how it plays out. It is not as if they could choke off high gas prices with higher interest rates.

Thanks again,

Jeff

[oldprof]

SI - Your comment about recognizing expertise is very interesting. You might want to check out a piece I did last year -- one of my personal favorites -- called The Three Amigos.
http://oldprof.typepad.com/a_dash_of_insight/2007/09/the-three-amigo.html

Thanks for your comments.

Jeff

[SI]

This pair of articles is a prime example of why I stopped reading the NYT several years back - it is written by the ignorant for the ignorant. It has very high standards of journalism but when it comes to technical matters, very high standards of IGNORANT journalism!

I probably know more than 99% of the general public in 2 different areas - computing and finance, and the main stream media coverage of each is so pathetic that I realized that I should only read what is written BY EXPERTS, but only in their own FIELDS OF EXPERTISE.

[SI]

The Fed are not monetizing bad debts - they are just providing liquidity.

Bear Stearns made bad debts and went bankrupt with JPMorgan picking them up for pennies on the dollar. (Stock holders got 10 or 15 c to the dollar.)

Countrywide made bad debts and B of A bought them for cheap. Some other hedge funds etc failed.

What the fed did was prevent this from becoming an all out disaster.

[shrek]

"The Fed mission is to address the twin goals of economic growth and price stability, while assuring stability in financial markets."

How can anyone conclude that the fed has fostered anything close to price stability in the last five years? The dollar has been murdered, housing went into a super bubble, and gas is now over 4 dollars.

The fed is the most overrated institution ever. Now they are monetizing bad debts!