20/03/2009

The Financial Crisis – Politics and Media.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
~ Henry Ford ~

 

With each passing day, I am increasingly appalled by the frequency of erroneous statements or deliberately oriented interpretations disseminated by the media concerning the financial crisis. Without doubt, it is difficult to explain clearly and succinctly these complex subjects that are making daily the news headlines. Nevertheless, the analysis, often oversimplified and biased, proffered by politicians, economists, political analysts, sociologists or other experts including the journalists themselves, are often disseminated by the media without sufficient discernment.  

 

Of course, it is appropriate to foster contradictory debate in order to avoid being subjected to a “pensée unique” all the more that, without a consensus on the diagnosis, it is legitimate that the proposed remedies differ. However, the desire to promote a diversity of opinions should not lead to provide systematically a platform to people – based, for instance, solely on their legitimacy as elected officials – whose knowledge is not necessarily commensurate with the topic being discussed.

 

Arguments, sometimes presented as objective analysis of highly technical questions, are often only a smokescreen for hidden agendas or the promotion of vested interests which, because of the implied authority of their authors, are able to sway the opinion of a misinformed public. It behoves the media to clearly set the appropriate background against which information is being disseminated. Very often, however, there is a focalisation on the polemical aspects of a news item which command a far greater audience than would a more pedagogic approach. The “title” and the “casting” of the current events week-end RTL-TV program “Controversy” illustrate perfectly this situation, where the “show” often overshadows the “content”.

 

The influence exercised by the media carries necessarily great responsibility with it, particularly with regard to the financial crisis as the latter is likely to lead to deep irreversible economic and social changes. All its actors, among which elected representatives, should share in this responsibility and work towards ensuring that the transition process is as harmonious as possible by spreading equitably the unavoidable sacrifices ahead.

 

In facing this challenge it is of vital importance that the citizen avoids being unconsciously seduced by populist or cheap slogans which gather credence on the back of the anger – often felt as wholly legitimate – provoked by the impunity of the perpetrators of flagrant mistakes of which they consider themselves to be the victims. One should never forget that it was by surfing on the sequels of WWI and the ensuing depression that fascist regimes conquered power in the 1930’s and that it took WWII to find an exit to that particular crisis. Important differences exist between the situation then and now but there are also, unfortunately, many common features.

 

A concrete and emblematic example will serve as an illustration:

 

The polemic surrounding the “bonus” issue allocated to senior managers of AIG (American insurance company rescued by the US government) has raised the anger of citizens, relayed by President Obama himself. However, if one lends a careful ear to his words, it will become apparent that the focus of the President’s anger is directed mainly to the excesses that have put the whole of financial system into jeopardy (including unacceptable and obscene levels of remuneration) and that his efforts are aimed at implementing reforms that will avoid running such risks in the future. The media, both American and international, Members of the Finance Committee of the House of Representatives (E. Liddy hearing), and numerous personalities have mainly directed their comments to the moral aspects relating the bonus (financed by the tax payer) attributed to managers of a failed company.

 

If, at first glance, popular anger seems fully justified, a closer examination of the facts is warranted. In the first place the USD 165 million disbursed does not constitute “bonuses” in the generally accepted sense of the term: rather than a share in the profits generated by a corporation – or a team or an individual – it relates in these specific cases to individual contractual arrangements providing payments (often differed until the beneficiary leaves the company) linked to the orderly winding down of a portfolio of contracts for which he is responsible.

 

According to the testimony, the liquidation of AIG is making substantial progress. There remains a portfolio of USD 1.6 trillion of derivative contracts (excluding the very large CDS exposure which has been settled) which entails continuous supervision on a daily basis. However distasteful (also for CEO E. Liddy who is working for a symbolic dollar a year), the decision of the management to enter into - and stand by - “retention contracts” with the necessary “experts” (some were fired without any indemnities), this option appeared as preferable to a unilateral breach of contract; the latter would have led to legal proceedings lasting several years but, more importantly, to the immediate departure of the people concerned, leaving AIG ill equipped to manage its risk appropriately and exposing the company to immediate bankruptcy. Such an option, put forward by several Members of Congress would have jeopardized the USD 80 billion still owed by AIG to the Federal Reserve and the Treasury, which an orderly unwinding should permit, providing the overall financial crisis does not worsen appreciably.

 

Even if some lack of transparency subsists in areas, such as the communication of information between the company, the Fed, the Treasury and Congress, the decision to stand by the signed retention contracts seems reasonable in light of the systemic risk that a failure of AIG continues to pose. This danger is clearly demonstrated by the astronomical sums disbursed in the unwinding of contractual obligations with other systemically significant players both domestic and international such as Goldman, Sachs, Merrill Lynch, Société Générale, Deutsche Bank, etc. which would have been swept up in a global melt down, had AIG not been rescued.

 

Other aspects - omitted or downplayed - concern the unutilised portion of USD 30 billion of TARP funds still available to the company and the sale at 60 cents on the dollar of 65 billion of assets to the FED (performing at better than 96% and a potential source of substantial profit for the tax payer) which significantly affect the correct interpretation of the USD 170 billion figure of government support that is being loosely bandied about by the media.

 

In the light of recent disclosures, many personalities, including American Senators and Members of the House of Representatives together with advocates of ultra liberal capitalism, have advocated the pure and simple failure of AIG and other financial institutions facing difficulties. If it is normal that these (irresponsible) opinions be relayed as “information”, it is incumbent on the media to draw the attention of citizens on the risks their implementation involves rather than implying their validity. A so called “neutral” stance is comparable to pretending that “creationism” should be put on the same footing as “Darwinism”.

 

Such biased and/or incompetent treatment of current affairs occurs repeatedly in matters such as Fortis, the reform of the international financial system, the analysis of stimulus plans, just to mention a few. All too often, a witch hunt takes precedence over the real societal challenges presented by the financial crisis. Such attitudes are likely to aggravate the situation instead of contributing to reinforcing solidarity, the need for which is palpable at national, European or global level.

 

15:42 Écrit par Paul N. Goldschmidt 13 Ave. Victoria 1000 Bruxelles dans Général | Lien permanent | Commentaires (0) |  Facebook |

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