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A conversation with the U.S. Managing Editor of the Financial Times.

Question: Did the FT’s news coverage help shape the way the crisis was perceived, or did the FT influence come primarily from its columns and blogs? (Felix Salmon, Reuters Finance)

Chrystia Freeland: I think the influence that the Financial Times came both through our new coverage and through our opinion pieces.  They do very different jobs.  Our reporting before, during, and I don't know if we want to say that now it's after the crisis, but at least in the aftermath of the most intense period of the crisis, is really about trying to fly as close to the ground as we can and trying as honestly and as intelligently as we can to tell people what is happening. 

Now, that doesn't mean, and I do think sometimes with hindsight, some of us think, well maybe journalists or economists should have known the crisis was going to happen.  I think that that notion comes from a very mistaken premise.  I don't think the future is knowable, I don't think that anyone has a crystal ball.  The best I think we can do is try to report on what is happening, what is knowable.  And certainly ahead of this crisis what it was possible to report on was that asset bubbles were starting to emerge.  And we did that.  We wrote very early about the bubble in sub prime assets.  We wrote very early about what was happening in some of the private equity deals, about some of the covenant light loans that were around.  We reported quite a lot about global financial imbalances.  So, we did have that reporting there and I think that was important. 

As the crisis began to snowball, I think what was important, and our strengths really were being able to write about this crisis as a global phenomenon.  I think it's our first truly global financial crisis and that meant that the fact that the FT I think is the most global of the big newspaper-based organizations right now, really gave us an advantage in covering it. 

Our commentary, I think, was important in two ways.  One was, in contrast with some other organizations in our pages, something that we very consciously do is try to have a broad church.  We don't have a single editorial line and we don't have voices all speaking in the same, or all singing in the same key.  I think with a crisis like this one that is particularly important because one of the things that we've seen is the consensus was often wrong.  The consensus was wrong ahead of the crisis and maybe the consensus had moments of being wrong in terms of what to do to address the crisis.  So, I think being open to a real diversity of points of view, a global diversity of outside voices has been a real advantage for our opinion coverage. 

The other thing that I would like to really sort of single out in terms of the strength of FT's opinion coverage is Martin Wolfe who is our Chief Global Economics Commentator.  And Martin was very, very prescient in terms of diagnosing global financial imbalances and the way in which they were skewing the whole global economy.  In the United States, I think this crisis tends to be thought of most often, as a crisis in the sub prime market, and that certainly was, if you will, the immediate symptom which emerged, maybe the immediate trigger.  I think though, if you look a little bit more deeply at the factors that play these global financial imbalances with China saving too much and the U.S. consuming too much really are one of the most important drivers of what was going on.  Martin, in his comment pieces, was very, very early to be writing about that and to be hitting on that. 

Question: Could business journalists have prevented the crisis if they’d asked different questions or covered different stories?

Chrystia Freeland: I absolutely do not think that even the most brilliant, insightful, thoughtful, journalism ahead of the crisis could have prevented it.  I think actually, that whole question speaks to what I would say is a mistake in mindset about financial crises and about the nature of bubbles in the economy. 

One of the things this crisis has reminded us of is booms and busts are endemic.  Booms and busts are the way the economy works, the way economic cycles work and one thing that I think has been quite important in terms of intellectual response to this crisis is to appreciate that we are never going to totally get rid of them.  I there may have been a train of thought, maybe particularly in the wake of the collapse of communism, when we had this moment of global capitalism really feeling invincible, feeling triumphant.  That we could get the economy exactly right and we could have happy days every day forever. 

What I think this crisis has reminded us of is that the workings of capitalism, the workings of the market are not perfect and you do inevitably have overshooting and then a response.  So, no, I don't think that even absolutely ideal financial journalism, which we didn't have by the way, would have stopped the crisis. 

Now, that's not to say that we business journalists could not have done better.  Of course we could have done better, and I do hope that in the wake of the crisis, we will do collectively now a couple of things.  I think the first thing is not to be scared by complexity.  One of the things that we have seen happening with globalization and with the technological revolution is financial markets becoming a lot more complicated and the global economy becoming a lot more complicated.  Sometimes I think journalists can be frightened by that complexity, maybe afraid that their readers or their watchers won't be interested in that level of complexity.  One thing that I think this crisis teaches us is we have to be really brave about that and really brave about taking on the complexity. 

The second thing that I would say that this crisis really teaches us is to be cautious about the consensus point of view and, again, as journalists, we have to be I think modest and humble in what we think we are able to do.  So, I think that it's too much to expect journalists to be the lone voice in the wilderness that notices the bubble and calls it, but I think at least what we can do is say, this is the consensus point of view, but here are two or three outlying voices and this is what the outlying voices have to say and these are their arguments, and at least make that descent a little bit more transparent. 

The final thing, and I do think this is a little bit less characteristic of FT culture, but particularly in the boom moment of this decade, I think in some parts of the business press there tended to be a certain triumphalism in coverage of business success.  Now, I do think that it is the job of business journalists to write about the success stories as well as the failures, and I think our readers are interested in that.  They want to know what's working and how to make it work.  But I think we have to be a little bit careful, maybe more careful than one tends to be in a boom time, not to blindly lionize the people who seem to be winning. 

Question: When the FT presents an economists’ view, how does their past track record play a factor in the credibility assigned to their views? (Dean Baker, Beat the Press)

Chrystia Freeland: I think that's a really good question and I do think that at the level of reporters, and also editors, we are thoughtful about, has the person been right in the past?  Is this person someone whose views therefore have credibility? 

Having said that, one of the interesting things I think about this crisis is it has shown that just as when we run advertisements for mutual funds, let's say, very often there is a disclaimer that says "Past performance is no guarantee of future performance."  And I think that disclaimer needs to apply to all sorts of performances including the performance of economists.

So, even if someone has a stellar record, that doesn't mean their prediction today will be right partly because someone might be very good at analyzing the contours of a sort of boom economy, but not be so good at calling the moment of disequilibrium.  Likewise, there might be some economists who were very good at spotting that moment of disequilibrium, but are less good at calling the boom.  And that's actually a phenomenon we have actually seen. 

So, for example, some of the people who were absolutely right on in assessing and diagnosing this bubble had appeared to be very wrong in the one or two or three years prior to the bubble bursting because they were the guys who were saying, "Oh my God, everything is going to go wrong.  Prices are inflated, this is an asset bubble."  And if you said that in 2007, you looked like a genius, but if you were saying that in 2004, or 2005, 2006, you were starting to look a little bit crazy.  And your underlying analysis may have been true to the fact, but the market kept on going up. 

So, while I am very sympathetic to Dean's point that we need to be thoughtful about the credibility of the people we are quoting, I think we also need to realize, ultimately there is going to be no formula, no algorithm that will validate which economist is going to be right and which economist is going to be wrong.  We need to use our judgment. 

Question: It seems that news and opinion are becoming entangled. What is the FT doing to ensure that it is viewed by the public as a credible broker of information? (Mark Thoma, Economist’s View)

Chrystia Freeland: I actually would very strongly challenge the premise of Mark's question, certainly as it applies to the FT.  I have had readers complain to me a lot about almost everything ranging from the size of our typeface to the headshots of our journalists to the placement of stories, and then of course to what those stories contain.  So, I am no stranger to reader complaints and if anyone has complaints, please send them to me. 

Having said that, I can't remember an occasion when someone has complained to me about too much of a mingling of opinion and news in the FT, or when anyone has complained that as a result of that, the credibility of the FT is in anyway undermined.  So, I'm not sure that applies to us. 

What I will say is we believe that it's our job to perform both functions and that we perform those functions quite differently.  So, the job of our news gathering and our news analysis is to be really rigorous about trying to figure out what's going on and trying to analyze what are the most important issues.  We don't cover every single thing in the world so our choice of what we cover is really important.  And then to trying to report as deeply as we can on what's happening.  That is quite separate from our opinion.  I think the real strength of the opinion in the Financial Times is that we are very open to outside voices and we are open to a real diversity of outside voices. 

Having said that, we in contrast with some news organizations don't believe that journalists or reporters should never express an opinion on our pages, and we do sometimes have our reporters writing opinion pieces in the pages of the Financial Times.  That, for us, has never really been a problem.  Maybe because the sorts of opinion pieces that our reporters do write, when they write them, are really analytical and fact-based.  It's less about making a partisan argument and more about saying, in this particular debate about financial regulation, I believe that such and such is the right policy and here are my reasons why.  So, maybe that's part of the reason why these issues are a little bit less heated for us. 

Maybe having said that, I might go on to add that I think that Mark's question speaks to what looks like the much more partisan coloration of the media in the United States.  This is a relatively new thing for America, not so new for lots of other countries.  The European media, for a long time has had explicitly point of view newspapers and news organizations.  And there again, I'm not sure that's a terrible thing.  I think where the point of view is explicit, then I think that viewers and readers are smart enough to know -- Fox, for example is going to present a more right-wing point of view.  And I think people are sophisticated enough to understand that.  I also think, and this may sound paradoxical, that as you see more exclusively partisan voices emerging there's actually going to be more of an audience and consequently more of a market for people like us who really see our job as being to provide people with, insofar as it is humanly possible, and none of us are perfect, what approaches an objective analysis and objective reporting. 

Question: Do you believe that what’s good for finance is what’s good for the country?

Chrystia Freeland: I think that it's important to be a little bit more specific in terms of what we mean when we're talking about finance.  Finance is a really big area.  There are a lot of people who work in finance, there are lots of different companies who work in finance, and the interests of every single financial services firm are not perfectly aligned, nor are the interests of the people working within a single financial service firm perfectly aligned, nor, as we have discovered with this crisis, are the interests of management and shareholders always perfectly aligned.  So, I think there are lots of very different interests involved. 

Having said that, I think that what we have seen in the past decade or so is a real growth of the financial services industry as a proportion of the economy and I think with hindsight, it's probably fair to say that it's not that safe and not that stable for the national economy to have finance be quite that big.  I think though, one of the things that it's easy to forget in the cry over the crisis is one of the things it did teach us is, how essential financial services are to the economy.  The reason for that $700 billion bailout was because the rest of the economy would not have survived.  We would have all gone down with Wall Street. 

So, I think we are in this paradoxical moment where we've now understood collectively more than ever how essential financial services are to the healthy running of everything else.  But at the same time, I think there is a dawning understanding that maybe having an economy which is over reliant on financial services is not that terrific.  And I do think that there is another really contentious issue at the moment, which is to what extent is the collective good served by really, really high profits being made by financial services firms and by people working in financial services firms?  And I think it is obvious why that should be such a politically contentious point right now because taxpayers, who in America, are suffering from 10% unemployment, realize that they rescued Wall Street with their money, they're maybe unemployed or certainly afraid of becoming unemployed and yet they are seeing the return of really hefty salaries and bonuses on Wall Street.  So, there sort of feels like there's a certain cognitive dissonance there. 

I think the best way to think about those questions though is not through the prism of compensation, but through the prism of what does the system need?  What benefits the system overall, and also, through the prism of, who now benefits from an implicit, or even explicit state guarantee.  And I think that we need to be thoughtful about those firms, those parts of the business which now effectively have a taxpayer insurance policy, because that's what happened in the fall of 2008.  And I think it is quite legitimate and indeed essential for governments and regulators to step in and say, "Okay, you are too big to fail, you're lucky in a way that you are too big to fail because it meant that we bailed you out, but what that means is, in the future, we have to rein in your activities in some lengths to at least minimize the possibility that this happens again."  Even as thoughtful legislators, thoughtful regulators, thoughtful economists go through that sort of a process, I think that it is important also to bear in mind that even in that kind of a more rigorous analysis, you could have players on the outside who explicitly do not benefit from a government guarantee.  And who therefore are free to take on the riskiest possible bets, free potentially to make the greatest possible returns, but also free to go broke. 

And one of the really interesting stories in this whole crisis is the dog that didn't bark as it were; which is the hedge fund industry.  I would say, ahead of the crisis, a lot of the Cassandra voices were talking about how hedge funds were posing a huge systemic risk to the economy, to the financial system.  And that wasn't a crazy thing to say.  In fact, we had seen the example of the LTCM in the 1990's.  As it turned out, hedge funds did not pose a tremendous systemic risk.  And what we saw was a really healthy operations of market mechanisms where a lot of hedge funds went broke, a very few made a great deal of money and industry is now coming back. 

Question: Why do you think we should or should not let big banks fail?

Chrystia Freeland: The question of whether banks should be allowed to fail or not, really ultimately has to be about is this bank too big, or too connected to be allowed to fail.  And regulators need to be very, very thoughtful at that moment of crisis about, if we let this institution go will everybody else suffer, or will it just be the institution that suffers? 

For markets to function properly, we should allow institutions to fail and we should be certain that the shareholders and the bondholders and the employees in those institutions that fail suffer.  That's how a market economy works.  People who make the right decisions prosper, but to enforce that discipline you have to make the people who make the wrong decisions go out of business. 

What was really problematic about this crisis was we collectively were not in a situation where that could be allowed to happen and collectively it became apparent as the crisis went on, and we do need to remember that Lehman was allowed to fail with really painful and instant implications.  So, at that moment, and it really was a post-Lehman moment, there was a belief, which I think was right, that you couldn't let the whole system fail. 

The consequences of that should be that regulators and lawmakers act now, in this lull after the storm, to limit the number of institutions and the size of institutions which are too big to fail.  And if there is a decision, which may be the case, that's it’s good to have really big banks that a national economy or a global economy is best served by the existence of big universal banks.  I think that's a legitimate outcome, but those banks then need to be subject to much stricter regulation than before so that it's much less likely that they should fail.  I think the right outcome is going to be some sort of a greater move towards intellectually separating the utility function of the banking industry from the casino function and we do need banks to perform the utility function.  Those banks should be really, really strictly regulated and very careful thoughtful policies should be in placed about how to handle the failure of those banks as we have in the example of the FDIC and the way it regulates and resolves the failures of commercial lending banks. 

On the other side of the divide, we should allow the continued existence of speculators.  I don't think speculation is a dirty word.  I think speculation is a really essential part of capitalism.  But we need to be sure that speculation, the casino function of finance, exists in a space where, if it fails because speculation by nature will fail a lot, it doesn't imperil the collective. 

Question: Simon Johnson has suggested that policymakers have been captured by the financial industry. Do you agree?

Chrystia Freeland: I think that Simon is a brilliant economist and the essay he wrote in The Atlantic was terrific.  As it happens, Simon and I have known each other for a long time and share a background in being involved, me reporting and Simon as an economist, and the collapse of the former Soviet Union and I think that it was that mindset which shaped Simon's intellectual response and offered him a prism through which to look at the relationships between government and the big banks here and see – I think that Simon would absolutely agree that there's not this sort of crony capitalism here that you would see in Russia, but to see some similarities. 

One thing that I think has become much clearer in the wake of the crisis, which I think maybe was not so apparent beforehand is the extent to which, intellectually, we were ill equipped to really understand the dynamics of what were going on in the developed western capitalist economies.  And I do think that one of the things that happened was, with the collapse of communism, a lot of us, and not just people who had a vested financial interest in this, but also academics, journalists, policymakers, a lot of us really bought into, for the best of possible reasons, the sort of end of history argument.  The view that this big economic question, which was the big question of the 20th century of what sort of economic system do you want? A communist system or a capitalist system had been definitively answered by the collapse of the Soviet Union and arguably by China's effective embrace of a market economy as well.  And I think that's right.  I think that big question has been answered. 

But I think what we then collectively tended to do is assume therefore that questions of political economy were no longer so central and that it wasn't so important in thinking about the economic rules of the game to think about those very basic, even sort of Marxist questions, about who benefits and who loses from any particular economic setup.  I think what we tended to start thinking; the intellectual toolkit which we used in thinking about economic decisions was really more engineering.  And we started to think that the big questions were going to be resolved just by sort of, smart people getting together figuring out what works best. And that was the way, that sort of very pragmatic approach was going to be the way that big economic questions got resolved.  I think there is still something to that and certainly when we write editorials in the Financial Times, that's the sort of approach which we try to have. 

But what I think we collectively stopped thinking about was – stopped really properly focusing on, was that when these big issues, when legislation about financial regulation, for example, gets actually hammered out by legislators, political economy enters into it.  And it's incredibly important to be thinking about which particular interests, which particular companies are going to benefit from this version of the law and which companies are going to benefit from that version of the law.  And it would be absolutely naive not to appreciate that's what lobbyists are for.  And also naive not to appreciate that as companies become bigger and more powerful they have more resources to throw into that lobbying game.  I don't think there is anything wrong with that.  That's democratic politics.  Everyone ought to, and does, lobby for their own interests. 

But I do think that we, as business journalists, and I would also say the community of economists need to factor into the equation a little bit more this notion. This appreciation of the fact that when there are debates, for example, over the regulation off credit derivatives: I think that's the hottest one in this space right now. It's not purely about intellectually opposing points of view, it's also about players on different sides of the debate standing to make or lose a very great deal of money.  And we fail our readers, legislators fail their voters when they don’t make clear that this particular way of regulating this particular market will make Bank X, much, much richer and maybe will carry the collective costs. 

Question: When the crisis hit, monetary policy did not adopt many of the unconventional techniques recommended for deflation such as price level targeting in the U.S., or currency depreciation in Japan.  Was the financial press aware of these options? (Scott Sumner, The Money Illusion)

Chrystia Freeland: I would disagree with part of Scott's premise, which is, implicit in the question is the notion that we are in a period of deflation, and also implicit in the question is that a lot of the unconventional tools of monetary policy weren't used.  I do think, actually, a lot of unconventional tools of monetary policy were used.  And one of the most creative players in the crisis turns out to have been Ben Bernanke with Mervin King not too far behind.  So, we did have and continue to have all sorts of unconventional forms of liquidity being injected into the markets by the world central bankers. 

Once they hit that zero rate where they couldn't use interest rates to gen up the economy, we have seen them using many, many unconventional tools to try to pump more money into the economy.  So actually, I do think we have seen all sorts of unconventional monetary policy responses.  And I do also think, and certainly journalists at the Financial Times are very well aware of the two economic arms that government has, monetary policy and fiscal policy.  And I think we've written with real sophistication about the monetary debate and then also about the fiscal debate. 

So actually I think both.  That we've had more creative policies than Scott would imply in his question.  But also that at the moments of decision I think that we were quite thoughtful and explicit in talking about what those options were. 

Question: How would you rate Obama’s performance so far?

Chrystia Freeland: I think to assess the links between the Obama administration and business is a really big, really complicated question and in some ways, it's still too early to answer it.  They haven't been in office for a full year.  And I think that there are different questions that need to be asked about the Obama administration in different areas.  So, there's one set of issues in healthcare, there's one set of issues in the environment and climate change, and there's one set of issues in financial services. 

To take financial services, I think fairness requires that we divide the response of the Obama administration into two parts.  The first is the immediate crisis firefighting.  There I think we really have to be careful not to apply the rules of calmness, of the markets having recovered, of the second Great Depression no longer seeming to be a possibility that might start tomorrow.  We have to be careful not to apply that mindset to the decisions we are taking in the crisis.  We also have to be mindful of the fact that the really big decisions about the financial crisis were all taken when George Bush was still President. 

Now, it is true that Barrack Obama made the explicit choice, effectively to carry on with those policies by promoting Tim Geitner from being the head of the New York Fed to being his Secretary of the Treasury, even so, the big decisions were already in place. 

Where I think the Obama Administration has a much clearer, much freer choice to make in its relationship with the banking industry in the post-crisis, is what the regulatory and legislative response is to this crisis.  And there we haven't yet seen, I think, a very robust response yet.  We had a choice by the White House to move on health care before moving on financial reform.  And in financial reform, we have not yet seen a sufficiently, in my view, aggressive response.  I do think that the right thing for this administration, for any administration to do is to say, actually, the rules of the game were a real problem ahead of the financial crisis.  And while before this crisis, maybe reasonable people could legitimately disagree about the extent to which markets self-regulate.  This crisis really is proof that they can't self-regulate and that booms and busts still do happen, and most importantly, that the collective costs of those booms and busts is really great.  And that is what gives government a right, and indeed a responsibility, to regulate in such a way that minimizes both the likelihood of those booms and busts, and more importantly, the collective costs of those booms and busts.  And I think the responsibility of government to do that absolutely outweighs both the growth penalty.  Because if you do have regulation that does inevitably cut down on innovation and that means that in your boom period, your boom is a little bit less vigorous.  And it also really means that government has a right to restrict the ability to grow of specific players and of specific firms. 

Question: You are a critic of the Efficient Market Hypothesis, calling it the biggest casualty of the crisis. Why?

Chrystia Freeland: In academic circles and on Wall Street, the Efficient Market Hypothesis has long been viewed with a lot of skepticism, or at least as a useful theoretical construct in some ways, but certainly not the definitive answer to everything.  So, I think it's not news for anyone that market players are not all perfectly rational, that markets are not perfectly efficient, that arbitragers do not in all circumstances arbitrage away mispricing.  Economists have been writing about this for a really long time.  Financial economists have as well.  There's a famous and really important paper by Andre Schwifer that was written before the Tech Bubble making this argument about how bubbles actually are endemic to the markets.  There's been some recent writing again, before this crisis, by a fabulous economist called Marcus Brunemeier at Princeton, where he makes the argument, backed by both empirical data and by some mathematical reasoning which says that actually it is in the interests of hedge funds to buy into a bubble rather than to bet against it. That's a really, really important point because so much of our thinking, and now I'm speaking not about our thinking in ivory tower, or our thinking of the smartest of hedge funds where people have known this.  I mean hedge fund managers have been buying into a bubble for decades, maybe for centuries.  But so much of our conventional wisdom thinking, and a conventional wisdom which I think had a great impact on policy, was that markets would take care of themselves.  And this was probably most eloquently and authoritatively this point of view was advanced by the U.S. Fed, and by Allen Greenspan, who was a wonderful advocate of this point of view, really eloquent, really persuasive.  And he has now slightly recanted it in the immediate wake of the crisis.  He said, "Actually, I'm so surprised and really so," he uses the word shocked, "that market players turned out not to be able to take care of their own interests."  To me, that is the big intellectual lesson of this crisis.  That what is in the interests of individual players and the individual players pursuing their individual interests collectively will not always create an outcome which is good for the collective or even for those individual players. And therefore you need someone in the center, an umpire, or a referee, whatever you want to call that person, to hold the ring and to care about the collective outcome. 

What I think is important in this way of thinking is to realize that having that umpire is good for everyone, even for the individual players.  And that's not a new intellectual concept.  There's lots of writing about what's called the tragedy of the commons.  And there are lots of other social and economic situations in which we've understood that if we let everyone pursue their own self-interests without having any rules, it's not going to work.  The fact that we have traffic laws is maybe the most obvious retail example of that.  I think we need to think about that more seriously when we are talking about financial markets. 

Recorded on December 7, 2009