ABSTRACT
The media have rightly been criticized for failing to adequately cover the crisis.2
Some news outlets (such as CNBC) were active cheerleaders for the bubble as it grew. But even the more responsible press were insufficiently critical in their reports of official views (“there is no bubble, just a little froth”;3 the problem of the subprime mortgages has been contained;4 the economy is on the way to recovery5 – just weeks before the economy sank into deep recession). How do we understand and explain these failures? What should the press have
done? In the aftermath of the crisis, governments around the world grappled with the question of how to prevent a recurrence. Some in the financial market have taken the view that crises are inevitable. To impose more stringent regulation would risk dampening innovation – and in the end would be futile in preventing a recurrence. The wiser course is simply to accept such failures as part of the price we have to pay for a dynamic market. So too, some claim the problems are inevitable and inherent in a free and market-driven press. In the case of the financial system, however, there is a broad consensus that
the response of passive acceptance is wrong: we may not be able to prevent crises, but we can make them less frequent, less severe, with fewer innocent victims. But in the case of the press, the question of whether there is anything that can be done to improve significantly the quality of coverage remains unresolved. I approach the problem from the perspective of the economics of information.
The function of the press in our society is to convey information to readers. Information enables readers – whether as consumers, managers, workers, investors, home owners, or voters – to make better decisions. Better individual decisions would have led to better societal outcomes. If home buyers had a better sense that they were buying into a bubble, they might not have been so willing to pay so much, the bubble would thereby have been diminished, and so too the consequences of its breaking. If those running pension funds had a better sense of the risks associated
with the financial products that they were buying-the toxic mortgages that polluted the entire global economy – perhaps fewer of them would have been produced, and perhaps America would not be facing the magnitude of the dislocation in its housing markets that it confronts today. If regulators had more of a sense of the bubble that was forming, perhaps they would have been less confident that it was just a little froth, and perhaps they would have done something to softly deflate it. Of course, each of these parties has a responsibility for gathering the information
required to make good decisions. The regulators have large staffs of economists who are supposed to inform them of what is going on in the economy; pension funds are supposed to gather information from a variety of sources before they put at risk the money that has been entrusted to them. Still, each of these is part of its own “society” and part of a broader society,
networks of individuals who share information and come to shared views, often in a too uncritical way. There is often a herd mentality underlying bubbles. Such a herd mentality can be especially strong in groups that do not have the checks and balances that can bring them back to reality – to say, for instance, that a price of $1,000 for a tulip bulb is not sustainable.6
