The Media's Heavy Hand

In his classic book "Manias, Panics, and Crashes," the economic historian Charles P. Kindleberger divides all financial manias into three rough phases. In the first, people discover the world has improved in some unanticipated way. The second phase features euphoria, when overoptimism stimulates a furious rush to buy stocks, bonds, land or raw materials. Finally comes the crash. People realize their delusion. Down come tumbling the "prices of commodities, houses... stocks... whatever has been the subject of the mania."

To Kindleberger's cycle has now been attached a parallel news cycle. Stage one is Revelation. The scribbling and chattering class proclaims some seismic economic change: say, the Internet revolution. Next comes a Heroes phase that names--and worships--the architects of the wondrous upheaval. The end, of course, is Recrimination. Utopian visions vanish. Time to round up the usual suspects.

We are now firmly in Recrimination. It's open season on anyone who might have illicitly caused the stock bubble or profited from it--Martha Stewart, Enron executives, dishonest stock analysts, wimpy accountants, greedy investment bankers. The press is enthusiastically beating up on these people, many of whom deserve it. But what the press isn't doing is reflecting on its own role in creating, and now popping, the speculative bubble.

It's considerable. In 1999, Time made Jeff Bezos, founder of Amazon, its Person of the Year. (Amazon's stock was then about five times its present level.) BusinessWeek, in an October 1999 cover story, announced "The Internet Age" and equated the new technology with railroads and telephones in significance--a judgment at best premature. And NEWSWEEK, too, was sometimes guilty of running stories whose gaga enthusiasm for the new technologies fed the stock boom. Here's one cover in early 2000: "The Amazing PlayStation 2--How Sony Will Change High-Tech Fun Forever."

Whatever print journalism's sins (and, to be fair, NEWSWEEK and some others wrote cautiously about the market), they were easily eclipsed by the electronic media, as Washington Post reporter Howard Kurtz shows in his book "The Fortune Tellers." Analysts' sensational stock forecasts were relentlessly "touted by CNBC and other media outlets," Kurtz notes. Some of these forecasts became temporarily self-fulfilling.

In this hothouse of exaggeration and techno make-believe, speculative practices flourished. Stock options soared. Companies were taken public (that is, their stock was sold to ordinary investors) too quickly. Day trading exploded. Corporate executives became increasingly obsessed with meeting or beating profit forecasts. How else to keep stock prices up--and realize huge profits from options?

A sober stock market and a speculative market differ fundamentally. In the first, most investors can win, because stocks rise for sound business reasons (usually higher profits). We had this sort of market through much of 1997. By contrast, a speculative market must mean big winners and big losers. It must breed huge resentments, because stocks prices rise to artificial and unsustainable heights. Those who sell near the top will win; those who don't won't.

By 1998, the market--and the news cycle--were moving from sobriety to speculation. The controlling Revelations were the Internet breakthrough and the New Economy. Heroes were anointed: techno-entrepreneurs and Alan Greenspan. The reigning moral climate was permissive. In a rising market, most investors could win. Few cared about ethical niceties.

Moral rectitude revived only with mounting losses. In 1999 and 2000, there were about 800 IPOs (initial public offerings of stock). On their first trading days, these stocks jumped an average of 65 percent, reports University of Florida finance professor Jay Ritter. Since then, about 45 percent have gone bankrupt, been merged out of existence or had their stocks delisted, he says. As the market falls, popular outrage rises. Given the speculative excesses, there's ample cause for outrage.

Up to a point, the Recriminations are useful correctives. People don't like bad publicity, let alone hostile congressional hearings, subpoenas, lawsuits and possible jail time. The threat of these retributions may promote, more than concrete "reforms," at least temporary self-restraint. It may inspire fewer accounting abuses, less greed in executive compensation and more candor in analysts' recommendations.

But there's also another possibility. It's that pack journalism may distort the market on the way down, just as it did on the way up. Will the legions of reporters and talking heads that sensationalized the Internet and New Economy now sensationalize corporate dishonesty? Will genuine crimes and mistakes be generalized to criminalize all of business? Will the press worsen the loss of confidence that it implicitly claims to be combating? Will the market, as a result, be unduly depressed?

Good questions. Hardly anyone in the press is asking them, because pack journalism means that almost everyone is chasing the same story.