The stories are the products of hard work and curious minds: in Fortune Carol Loomis and in Washington Monthly Byron L. Dorgan (the Democratic Senator from North Dakota who also, as the NYT’s David Leonhardt noted last year, was one of the few voices raised against the repeal of Glass-Steagall). But the writers also had the privilege of cover stories with a lot of space, so the publications themselves deserve considerable credit as well.
The two stories are quite different but equally useful, especially read in concert. Fortune takes a more technical view of the situation, explaining in detail how derivatives work. Washington Monthly gives more of a layman’s account and focuses on the big picture. Neither story minces words.
Fortune’s Loomis offers warnings like:
Most chillingly, derivatives hold the possibility of systemic risk—the danger that these contracts might directly or indirectly cause some localized or particularized trouble in the financial markets to spread uncontrollably. An imaginable scenario is some deep crisis at a major dealer that would cause it to default on its contracts and be the instigator of a chain reaction bringing down other institutions and sending paroxysms of fear through a financial market that lives on the expectation of prompt payments. Inevitably, that would put deposit-insurance funds, and the taxpayers behind them, at risk.
And the magazine itself gives this prescient comment in an editorial:
The vast swelling of the so-called financial derivatives market to trillions of dollars has given investor after investor, not to mention lawmakers and corporate executives, a touch of that shiver. Some fear that this may be more than just a benign shifting of tectonic plates, but perhaps a precursor of the financial equivalent of the Big One.
Washington Monthly hits the right note immediately by mentioning the Fortune story up top—after all, big issues like derivatives can only be sufficiently covered by multiple stories, one building on the other—and then hits its stride a few paragraphs in:
Yet, this ‘false alarm’ could turn out to be a harbinger of a real financial conflagration—one that would make us nostalgic for the days of the $500 billion savings-and-loan collapse.
And about the chances of broader economic collapse, Washington Monthly makes a point so simple it seems almost self-evident, and yet virtually no one else in the press made it:
If this seems a remote possibility, don’t forget that financial implosions nearly always seem that way—before they happen.
That’s right. And all it takes is that one simple insight to undercut voice after voice saying how unlikely collapse was.
We add a related point: One of the reasons we don’t see economic collapse coming is that we would prefer to see ourselves as on track, rather than spinning wildly out into the ether. To that end we, perhaps understandably, sometimes fit the facts to our sensibility, rather than the other way around. But one job of the press is to be better seers than everyone else, less willing to be lulled into false contentment.
The Washington Monthly piece is so painfully on target, we can’t help but offer a few more choice quotes. First:
All that stands between the public and a financial disaster of this sort is the guardians of the banking system in Washington. Regrettably, they are outgunned by the derivatives dealers in several ways.
And then some thoughts on the press that echo our own:
[A]lthough some members of Congress are awake to the derivatives problem, it takes more than that to reach a critical mass.
That’s where the press comes in—or should. But except for a few pieces, the national press has been cowed by the complexity of the subject. Instead of inquisitive reporting, we get reports of assurances from Greenspan and others.
Yes! That is exactly right.
And why any fair analysis of how we got here must involve some serious soul searching on the part of the press.