Hard evidence that bankers frame the discussion of the financial crisis and financial reform

Mike Berry at Cardiff University provides hard evidence that the mainstream media effectively allowed the bankers to frame the discussion of the financial crisis.

Being able to frame the discussion of the financial crisis was critically important as it allowed the bankers to effectively block the discussion of solutions that would have been unfavorable to them.

For example, the bankers blocked discussion of both the Swedish Model and transparency.

Under the Swedish Model, the banks would have been required to recognize upfront their losses on the excess debt in the financial system.  Doing so would have protected the real economy from the burden and distortions caused by the excess debt and the policies to protect bank book capital levels and banker bonuses.

The Swedish Model was almost never discussed (it was and still is by your humble blogger).

Instead, the focus was on the need to adopt the Japanese Model and protect bank book capital levels and banker bonuses at all cost because without doing this banks couldn't lend more to support economic growth.

Of course, the argument for adopting the Japanese Model wasn't true.  Banks are designed to continue to support the real economy even when they have low or negative book capital levels.

Why can banks do this?  Because of the combination of deposit guarantees and access to central bank funding.  With deposit guarantees, taxpayers effectively become the banks' silent equity partners when they have low or negative book capital levels.

Bankers kept transparency out of the discussion (despite opaque, toxic subprime RMBS deals being at the heart of the crisis) because they make their money from the use of opacity.  When investors and regulators cannot properly assess the risk of the banks or the financial products the bankers produce, bankers profit off of the underpricing of risk.

However, if you want to take risk out of the financial system, you have to bring valuation transparency to all the opaque corners of the financial system.

To date, any conversation about bringing transparency has focused on price transparency.  However, price transparency is meaningless without the ability to independently assess the risk of and value using valuation transparency.  Without valuation transparency, there is no point of comparison to make buy, hold or sell decisions based on price.

Instead, market participants are simply gambling on the content of black boxes and brown paper bags.

Mr. Berry and his colleagues did a content analysis on the BBC coverage of the financial crisis.  What they found was:

The robustness of these findings is reinforced in research on how the BBC’s Today programme reported the banking crisis in 2008. 

The table below shows the sources featured during the intense six weeks of coverage following the collapse of Lehman Brothers.

Today programme banking crisis interviewees 15/9/2008 to 20/10/2008.

The range of debate was even narrower if we examine who the programme featured as interviewees in the two week period around the UK bank bailouts. This can be seen in the next table.

Today programme banking crisis interviewees 6/10/2008 to 20/10/2008.

Here opinion was almost completely dominated by stockbrokers, investment bankers, hedge fund managers and other City voices. Civil society voices or commentators who questioned the benefits of having such a large finance sector were almost completely absent from coverage. 

The fact that the City financiers who had caused the crisis were given almost monopoly status to frame debate again demonstrates the prominence of pro-business perspectives.