Tuesday, 12 July 2011

Cracking a nut with a hammer (the return to a regular theme)

One of Ben Goldacre’s best jokes is to suggest that the Daily Mail has embarked on a grand oncological ontology experiment in which it seeks to divide the world’s inanimate objects between those that cause cancer and those that cure it. Other newspapers have different obsessions. The News of the World, for instance, had its own project to peep and pry on behalf of the nation’s prurient busybodies while attempting to redefine ‘the public interest’ as to mean ‘whatever some of the public could be interested in’.

But given my background in debt it is The Guardian’s ongoing campaign to mislead its readers about debt that regularly attracts my attention. As part of this project, most days the newspaper will publish at least one debt-related story but omits a key piece of information or analysis allowing the author of the article to declare the financial markets are singularly corrupt or evil in some way.

Guardian readers, many of whom have been brought up on the watery soup of quasi-Marxism espoused by polemicists such as Michael Moore or Naomi Klein, lap up these safe anti-establishment stories, just as Mail readers relax in the knee-jerk right-wing idiocies of Richard Littlejohn.

But by lazily assuming all finance is somehow wrong, the newspaper prevents itself from producing meaningful analysis of how finance works. Among those that understand finance, the unreliability of The Guardian’s business pages is simply a bad joke.

For instance, when Jill Treanor got on her high horse about Barclays not paying taxes, she did so seemingly without knowledge of basic accountancy rules, rules that her own company had used for similar advantage. And some. Moreover, The Guardian’s great campaign against Tesco’s tax structures quickly ran into the ground when the retailer was able to easily show that many of the newspaper’s allegations were false.

Embarrassing and expensive incidents like these appear not to have dissuaded the newspaper from its overarching project to mislead.

On Sunday, the economics editor of The Observer (owned and operated by The Guardian), Heather Stewart, declared: “Defaulting rescued Argentina. It could work for Athens too.” Then followed an analysis so oddly skewed it might well have been written sideways.

The thesis was outwardly plausible – Argentina had defaulted on its debt a decade ago and recovered, maybe Greece could do the same? But the article didn’t explain that Argentina’s recovery since the default was largely due to the commodity boom (Powerpoint file), not because it had failed to repay its debts (though the devaluation also helped). It was a bit like reading about a lottery winner's work ethic but not mentioning that person's wealth derived from having bought a winning ticket.

The following day the Guardian website published another article on the theme of debt, this time by the blogger David Malone. I have come across Mr. Malone’s theories about finance before on the Liberal Conspiracy website (a peculiar name, because there is rarely anything liberal published on the site which slavishly believes in growing the state, and is allied with parts of the Labour Party). Mr. Malone is an enthusiastic amateur – in that he has no professional experience of journalism or finance – but recently published a book called “The Debt Generation”. Mr. Malone’s style is both tedious and accusatory; he demonstrates that a small amount of knowledge can be a dangerous thing.

As such, he is perfect for today’s Guardian, which published his article that declared that “our wealth is disappearing” due to the needs of a group he specifies as “bondholders”. The article states: “Gradually the story (of the financial crisis) became less about the banks owing us money and more about owing the bond holders.” The piece is like a party of straw men all competing for the honour of who can be most misleading.

But to a non-specialist, Mr. Malone's article may seem plausible and the detail he introduces through the second half of the story would make many readers believe this is a man in charge of his brief. (Several comments underneath the article demand more from Mr. Malone.) However, to someone with knowledge of political economy and finance the article is a shambles, full of mixed-up ideas and ill-judged accusations, as well as basic errors. Mr. Malone’s central charge, that bondholders are being protected while the public have to pay for debt write-offs, is simply untrue in most senses of the words.

In the most advanced case of a eurozone bailout, the Irish government has successfully forced losses of up to 90% on lower-ranking bondholders. Meanwhile, it has been able to protect the state’s holding in the “equity” (or shares / ownership) of the banks, which theoretically should have taken losses before the bonds.

Meanwhile, the situation with regard to Greece is that there is a long argument going on between many different actors, with many different incentives, to work out who will take losses, and how much these should be. The idea that bondholders won’t take losses on Greek debt hasn’t been the case for weeks, if not months.

On the other side of the equation – that the public are being unfairly singled out – this also doesn’t stand up to scrutiny. Mr. Malone’s accusation is: “Public debt … at the insistence of the same banks and bond holders we have bailed out, is being paid down at breakneck speed, no matter what the cost in unemployment and the destruction of social services.”

Like others Mr. Malone here confuses debt and deficit. The UK government’s actual focus is on reducing the deficit – the amount more it spends than its income – rather than its absolute level of debt. Indeed, debt levels in the UK will rise in the next few years, as will state spending. The arguments over the last year have all been about the rate at which this debt level will rise, not about cutting it.

Given this level of ignorance, it almost feels unfair to focus on Mr. Malone’s writing. Clearly he doesn’t know a great deal about the subject that he writes, so why bother so clearly demonstrating it? Surely this is a hammer to crack a nut.

Unfortunately, and as seen with the plagiarist Johann Hari, people that don’t know anything and can’t reliably report facts regularly make it to the top of the British commentariat. Ignorance is no barrier to success, even in apparently technical fields. All it takes is to have views in line with the newspaper’s own prejudices and a talent for self-promotion.

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