Undercover Economist

Shock news? The media didn’t get us into this mess

Did Robert Peston cause the credit crunch? Some people seem to think so: the Daily Mail recently asked if he had too much power; Neal Gandhi, the chief executive officer of an outsourcing company, claimed that “because of his influential position, his predictions come true almost exclusively because he has predicted them”. This seems implausible, and I’m not saying that merely because Peston once worked for the Financial Times. After all, there’s a credit crunch on in New York too, where few have ever heard of the BBC’s inimitable business editor.

It is less absurd to claim that media exaggerations have deepened the recession, perhaps even caused it. Mark Fenton-O’Creevy, a professor of organisational behaviour at the Open University, argues that “media stories on the current turmoil are not just reflecting events, they are also creating them”. The journalist Michael Blastland, an evangelist for responsible use of statistics, argued in a debate at the Frontline Club in November that the media’s gloom about consumer spending had far outpaced any signs of a slump in the data and was contributing to the downturn.

Let’s examine this for a moment. Media reports are often excitable and rarely put economic data into context – but are they powerful enough to tip us into recession? That could only be true if economies were largely confidence tricks, with consumer and business spending tied less to income and more to the front pages of the tabloids. Economies very rarely work like that: were the FT to pronounce “everything’s nifty” on Monday, niftiness would remain elusive. We have run up against hard constraints. Banks made large losses long before depositors started twitching. Consumers had borrowed heavily, making it almost inevitable that at some stage spending would fall as they paid off debts. Ignorance or overconfidence allows us to defy gravity for a while, but not forever.

One case where prophecies can be self-fulfilling is a bank run. Banks can become unsafe for no reason other than that everyone believes them to be unsafe. Peston could bankrupt the safest bank in Britain if he announced on the breakfast news that it was going under and everyone should pull their money out at once. But the banks have largely melted down without the help of panicking depositors. They have been stricken because institutional investors, who do not make their financial decisions based on mass-market media reports, would not lend to them; and, indeed, because they would not lend to each other. When Iceland’s banking system collapsed in October, the problem was not that the media had panicked depositors. On the contrary: even as the money markets utterly lost confidence, British newspapers were claiming that Icesave offered one of the best savings products around.

Beyond the bank run, I am even less convinced that the media are to blame. Most of us continue to make our decisions based on our unique personal financial circumstances.

It is true that the media can set the economic mood. Two Federal Reserve economists, Mark Doms and Norman Morin, have found evidence that media reports of economic distress (pre-credit crunch) have always tended to knock consumer confidence, even if the economy is doing well. Thankfully, it is a long way from the survey to the high street. Researchers at the National Institute of Economic and Social Research have concluded that surveys of consumer confidence do not provide much help in predicting what consumers subsequently do. In other words, if Peston tells us it’s bad, we repeat his incantations when someone with a clipboard asks us how we’re feeling. Then we pull out our wallets and hit the shops.

Also published at ft.com.