Counterproductive Counterintuition

An ill-advised exercise in counterspin in the Times

The counterintuitive story is a staple of journalism, especially of the business press. When the news zigs, the counterintuitive story zags, offering plausible reasons why conventional wisdom is wrong. It can be a useful exercise, and can help break up the monotony of bad news.

And it is true, the financial and economic story has been zigging in one direction, down, for many months now.

But even so, a recent New York Times counterspin story, headlined “Good News: Housing’s Down, Market’s Off, Oil’s Up,” strikes us as glib, callous, and misleading. The piece betrays class and ideological biases, we believe, and adds to a creeping sense that the business press is more than a little insulated from the consequences of Wall Street’s most recent predations.

Looking for benefits in the current financial downturn, the story finds some in rising oil prices, falling home prices, and falling stock prices. That’s fine—but even in an abstract exercise, a pre-Thanksgiving flier, the assertions must have some reasonable basis.

Let’s start, like the Times, with stock prices.

The best place to start is the stock market, because it’s the most counterintuitive. The notion that anybody but a sophisticated Wall Street short-seller should be hoping that stocks fall sounds, frankly, bizarre. But it’s true: a huge chunk of the population — including most people under the age of 50 — has benefited from this year’s market drop.

The author says people at least twenty years from retirement who don’t actively trade stocks but do have 401(k)s and individual retirement accounts do not want a quickly rising stock market. The story cites a 1999 Business Week article by Peter Coy, titled “A Soaring Market Can Sure Bring You Down,” which notes that a quickly rising market hurts long-term returns. Offering evidence that most people are in the market for the long term, the Times says:

Only 21 percent of families owned stocks outright in 2004, the most recent year for which the Federal Reserve has released data. Almost 50 percent of families owned a retirement account, by contrast.

And so:

Unless you’re about to retire or sell stock for some other reason, you shouldn’t get too upset about the market’s fall. As long as you are planning on more buying than selling over the next decade or two, a market correction is your friend.

First, anything that says things will be okay “over the next decade or two” has hedged itself into absurdity; the Depression lasted “only” a dozen years.

But, think about it. The number of households with heads nearing retirement age is huge. We looked it up: 36 million households in 2000. That’s about a third of the country (105 million households).

Also, the very Fed data cited by the Times tell us that the older part of the population holds most of the stock market wealth. That’s just commonsense anyway.

So, the Times counts out an enormous portion of the population, and the one with the most to lose. These are atypical investors?

Also, the fact that only twenty-one percent of the population own stock directly is true, but not helpful. The better number is direct and indirect stock ownership. Now, we’re up to forty-nine percent of families. And a surprising amount of low-income people’s (modest) wealth is tied up in the stock market: thirty-one percent for stockholders in the bottom 20th percentile.

Why is this the better number? Because these people could conceivably be in a group that would, as the Times says, “sell stock for some other reason,” even stocks in a retirement account. Given the debt crisis, which has hit those with shaky credit hardest, that “other reason” could very well be staying solvent.

In that vein, the piece’s jaunty tone is just plain bizarre and betrays a misunderstanding about the nature of this particular stock market drop. It is not an act of nature, as the story implies. It is instead an inevitable result of widespread manipulation of the financial system by agents and intermediaries up and down the ladder, from mortgage brokers to Wall Street.

This drop even more than usual comes at the expense of financial-services fiduciaries and customers. The Times should think twice before applauding. But if it does, it should at least acknowledge that any benefit is coming amidst a colossal injustice.

We think the Times here is, unwittingly, transmitting a conventional business-press truism that is actually a conservative fallacy in disguise: to wit, that “we” as a society need to take “our” medicine to atone for “our” excesses.

Audit Readers, that notion is false on many levels. We ask the business press only to be conscious of the truism and examine it with the usual rigor and skepticism.

Allow us to take issue with another assertion in the Times story: that a falling market will force people to save more.

[The market’s fall is] also likely to improve the nation’s long-term economic prospects. The bull market of the 1990s, combined with the housing boom, fooled many people into thinking they didn’t need to save money.

“Fortunately,” the Times says, “the savings rate
has begun to climb, especially since the housing market turned.”

Again, we recognize this is a thought experiment, but this whole idea doesn’t bear even the slightest scrutiny.

First, it is fallacious to link cause and effect here. The savings rate has been falling in this country since the mid-1980s. Also, economists have studied the wealth effect, but haven’t pinned it down empirically.

But more broadly, the assertion is based on a flawed assumption that, we think, is widely shared among business reporters and editors. Do they really still believe that saving habits are a matter of choice—whether to open a money-market account or buy that flat-screen TV? That’s what the financial-services industry says. But a growing body of serious work suggests that low savings and high personal debt are a result of declining real incomes and working families’ struggles to pay for the basics—housing, health care, and education.

And, wait a minute. Are people really saving more now? In fact, savings are up and down lately—up in the third quarter, down in the second. People saved at a higher rate at the end of 2004, when the housing market was still strong, than at anytime this year. The link to the housing market? There isn’t any.

And one last thing:

It’s not even clear that falling house prices are such a bad thing. They don’t really matter for families who aren’t planning to move. They don’t even matter much for families moving to a similar house in a similar market. The house they are buying will have gotten cheaper, too.

Families hoping to buy their first house, on the other hand, clearly benefit.

With foreclosures hitting 220,000 a month, talk of silver linings verges on bad taste, even in an analysis piece.

But even for young renters, getting credit will not be easy. Indeed, Mark Zandi, chief economist at Moody’s, says first-time buyers are “in big trouble,” in a NewsHour segment titled “Housing Market Decline Impacts First-time Buyers, Lenders.”

But, sure, for the young, relatively well-off, who have good credit, a housing and market crash will help, assuming there’s no recession and you keep your job.

So what?

Again, we understand the spirit of the story. But this time the counterintuitive angle asks too much.

We would suggest a counter-counterintuitive spin, the one that fully prepares readers for what’s coming.

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Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.