Ups and Downs on Wall Street Send Journalists Panicking
Whatâs been going on in the stock market?
CNBCâs Jim Cramer said âArmaggedon.â Chris Cuomo said it was âcrashing.â
ABCâs Charles Gibson hailed âthe most important economic event since 9/11.â
In the past few weeks, media coverage of the turbulent stock market and the Federal Reserveâs response has been a âroller coasterâ ride for viewers â from network to network, some journalists provided hype and gloomy speculation while others remained calm.
CNBCâs Jim Cramer went on an impassioned rant August 6 calling for the Fed to reduce interest rates.
âBernanke needs to open the discount window. That is how bad things are out there âŚ in the fixed income markets we have Armageddon,â said Cramer on âStop Trading!â Following Cramer's rant, NBC brought him on âTodayâ to analyze the economy August 10.
NBCâs Meredith Vieira asked âAre the markets about to crash?â on the August 10 âTodayâ show.
Wall Streetâs ups and downs have been linked to problems of mortgage defaults, particularly âsubprimeâ or high-risk mortgages. The Federal Reserve Bank did not choose to lower interest rates, but it did step in the week of August 6 to âinject liquidityâ â put simply, cash to back up possible withdrawals â to help calm panicky markets.
Though that was a normal action for the Fed, journalists acted as though the market was on the verge of catastrophe.
Getting it âDrasticallyâ Wrong
News reports about the Federal Reserve Bank buying those âriskyâ loans portrayed the action as very unusual and contributed to the hype over what was happening to the stock and housing markets.
âWe begin tonight with a credit crisis in the nationâs mortgage market. It got so bad that the Federal Reserve Bank today took a drastic step, pumping $38 billion into the banking system, the largest such total for a single day since the panic that followed September 11,â said Cynthia McFadden on the August 10 âNightlineâ
Kelly Wallace of CBS made a similar point on the âEarly Showâ August 11.
âThe nationâs Central Bank injected $38 billion into the system Friday, something it hasnât done since the September 11 attacks,â said Wallace.
Maria Bartiromo called it an âextraordinary moveâ on âNBC Nightly Newsâ and Charles Gibson said âIt may be the most important economic event since 9/11â on âWorld Newsâ August 10.
More important than record stock market highs, virtually full employment, 47 months of straight job growth, growing GDP and low inflation.
But economist Brian Wesbury told the Business & Media Institute that the Fedâs injection of âliquidityâ â essentially cash to back possible withdrawals â and purchase of mortgage-backed securities was not as strange as the media led viewers to think.
â[T]heyâre [the Fed] coming in every single day and on average adding $9 billion a day. Thatâs not $24 billion, thatâs not $38 billion, but still theyâre in every day. And they also, frequently in the past year have bought mortgage securities. This is not new either. âŚ To believe this is somehow brand new is just not true â theyâve always done that,â said Wesbury, chief economist of First Trust Advisors L.P.
Wesbury added that the reason the Fed purchased mortgage securities is because they bring in high returns.
Will the âNightmareâ Continue?
Panicked journalists worried that the âcredit crunchâ and the âroller coasterâ stock market could lead to worse things for the U.S. economy. Some even started mentioning the âRâ-word: recession.
âDo you think that we could go into recession?â CNNâs personal finance editor, Gerri Willis asked on CNNâs âOpen Houseâ August 11.
CBS âEarly Showâ host Hannah Storm interviewed Liz Ann Sonders, chief investment strategist for Charles Schwab on August 10.
Sonders said that because âaccess to credit is freezing up, then that is undoubtedly going to cause some problems. It doesnât guarantee that we move into recession.â
Storm replied, âSo the housing market nightmare will continue here?â
But as the Mortgage Bankers Association indicated, the foreclosure rate is 1.28 percent â meaning more than 98 percent of mortgage holders are not in foreclosure.
A few journalists have also speculated since August 6 that the stock market might crash, or implied that it already had crashed.
âGood Morning Americaâsâ Chris Cuomo was feeling sorry for borrowers and disparaging the stock market, which he called âlegalized gamblingâ in an August 13 report.
âA slight increase in a rate can be a burden, or it can mean that they literally cannot afford to buy a home, and that will be a tragedy that goes far beyond the crashing of the stock market,â said Cuomo despite the fact that the stock market hadnât crashed.
In fact, the August 9 triple-digit drop (213 points) came only a few days after a triple-digit increase (505 points from August 6th â August 8th). On top of all of this, the three big markets are up for the year. The Dow is up 6.2 percent, while the S&P 500 is up 2.5 percent and the Nasdaq is up 5.4 percent.
Still, Meredith Vieira asked if the âmarkets [were] about to crashâ on âTodayâ August 10. CNBCâs Erin Burnett compared the similarities between 1987 and 2007, but concluded that ââa lot has changedâ and that the mortgage problems âmight not actually cause a crash.â
But Vieira kept pressing the question, asking CNBCâs Jim Cramer, âAre we headed for another Black Monday?â
Even Cramer, who had called the fixed income markets âArmageddonâ earlier in the week replied, âNot even a chance âŚ I think thereâll be a slowdown â I donât want to say a recessionâbecause of this problem.â
Calm, Cool and CNN
Not all the reports foretold calamity. Some pointed out that despite the ups and downs, the economy was holding steady and the stock market wasnât exactly crashing.
CNNâs Ali Velshi reminded viewers of that on the August 13 âAmerican Morning.â
âBut you know, after all that volatility last week, after all âthe sky is falling,â take a look at how these markets did in the United States over the last week. The Dow was actually up.â Velshi continued: âNow for markets to this point this year, in August, we are looking at a Dow that is up more than 6 percent so far for the year. Thatâs not terrible. The skyâs not falling, actually. The S&P is only up about 2.5 percent and the Nasdaq is up above 5 percent.â
Likewise, ABCâs Bianna Golodryga had a calm perspective on the August 10 âGood Morning America.â She said most experts would agree with the president that a government bailout for mortgage defaults wasnât a good idea, âsaying that the market should correct itself.â
âBut, Chris, we have to sit back and realize that even with all this volatility, weâre up 6.5 percent on the Dow this year and most industries are in the green,â she told Chris Cuomo.
Some programs featured experts who were able to shed some rationality on the situation as well.
The CBS âSaturday Early Showâ August 11 brought on Greg McBride, senior financial analyst for bankrate.com. McBride counseled viewers about investing, explaining that people with 401(k)s shouldnât panic, because their stock investments were for the long term. Meanwhile, he advised mortgage buyers of things they should know about their mortgages.
Even if someone had a subprime loan and couldnât refinance, he said, âThis is not something you want to run and hide from. Particularly right now a lot of lenders have been empowered to do whatâs known as a loan modification. They can basically adjust the terms of your loan to help you stay in your home. So, by all means, if you find you canât afford those payments, contact your lender right away.â
âCongress Never Touches Anything They Donât Hurtâ
While the media reports over the past week didnât include much about possible government solutions to the problem, some politicians are discussing a legislative response.
The Hill reported on August 15 that the Senate Banking Committee is âhashing out a narrow bill that may be the most serious response by Congress to the troubles rocking the mortgage market.â
Though not as extreme as several Democratsâ proposals to give borrowers a pass, that âserious responseâ would allow the Federal Housing Administration (FHA) to guarantee loans with no money down â one of the subprime lending practices that has fueled the mortgage mess.
The FHA is the âfederal agency that guarantees home loans to people who may not otherwise qualify for mortgage insurance,â as The Hill described it. Senators are also looking at provisions that would raise the amounts the FHA could guarantee.
But The Hillâs Jessica Holzer noted âconcerns that a fortified FHA could pose a risk to the taxpayers and crowd out private mortgage insurers.â
The government already puts pressure on lenders under the FHAâs âloss-mitigation program,â which aims to keep borrowers from getting foreclosed. A Housing and Urban Development spokesman made a revealing comment to Holzer: âBecause weâre the government, we require the lenders to work with the borrowers to allow people to stay in their homes.â
Supporters of the free market say that government interference is not the right solution.
âRemember, Congress never touches anything they donât hurt. They never intend to do that, but it turns out they canât act fast enough in our modern economy to do any good as a reactive force,â said William Beach of The Heritage Foundation.
Business & Media Institute adviser and Hillsdale College professor Gary Wolfram said in an interview that government interference is what could actually jeopardize the economy.
âThe main threat lies in overregulation and high taxation. Thatâs the main threat to the economy,â said Wolfram. âThe real problem is not the lending market. The real problem is in the taxation and regulation policy.â
Staff writer Jeff Poor contributed to this report.