What’s been going on in the stock market?
CNBC’s Jim Cramer said “Armaggedon.” Chris Cuomo said it was “crashing.”
ABC’s Charles Gibson hailed “the most important economic event since 9/11.”
In the past few weeks, media coverage of the turbulent stock market and the Federal Reserve’s response has been a “roller coaster” ride for viewers – from network to network, some journalists provided hype and gloomy speculation while others remained calm.
CNBC’s Jim Cramer went on an impassioned rant August 6 calling for the Fed to reduce interest rates.
“Bernanke needs to open the discount window. That is how bad things are out there … in the fixed income markets we have Armageddon,” said Cramer on “Stop Trading!” Following Cramer's rant, NBC brought him on “Today” to analyze the economy August 10.
NBC’s Meredith Vieira asked “Are the markets about to crash?” on the August 10 “Today” show.
Wall Street’s ups and downs have been linked to problems of mortgage defaults, particularly “subprime” 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 “inject liquidity” – put simply, cash to back up possible withdrawals – 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 ‘Drastically’ Wrong
News reports about the Federal Reserve Bank buying those “risky” loans portrayed the action as very unusual and contributed to the hype over what was happening to the stock and housing markets.
“We begin tonight with a credit crisis in the nation’s 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,” said Cynthia McFadden on the August 10 “Nightline”
Kelly Wallace of CBS made a similar point on the “Early Show” August 11.
“The nation’s Central Bank injected $38 billion into the system Friday, something it hasn’t done since the September 11 attacks,” said Wallace.
Maria Bartiromo called it an “extraordinary move” on “NBC Nightly News” and Charles Gibson said “It may be the most important economic event since 9/11” on “World News” 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 Fed’s injection of “liquidity ” – essentially cash to back possible withdrawals – and purchase of mortgage-backed securities was not as strange as the media led viewers to think.
“[T]hey’re [the Fed] coming in every single day and on average adding $9 billion a day. That’s not $24 billion, that’s not $38 billion, but still they’re in every day. And they also, frequently in the past year have bought mortgage securities. This is not new either. … To believe this is somehow brand new is just not true – they’ve always done that,” 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 ‘Nightmare’ Continue?
Panicked journalists worried that the “credit crunch” and the “roller coaster” stock market could lead to worse things for the U.S. economy. Some even started mentioning the ”R”-word: recession.
“Do you think that we could go into recession?” CNN’s personal finance editor, Gerri Willis asked on CNN’s “Open House” August 11.
CBS “Early Show” host Hannah Storm interviewed Liz Ann Sonders, chief investment strategist for Charles Schwab on August 10.
Sonders said that because “access to credit is freezing up, then that is undoubtedly going to cause some problems. It doesn’t guarantee that we move into recession.”
Storm replied, “So the housing market nightmare will continue here?”
But as the Mortgage Bankers Association indicated, the foreclosure rate is 1.28 percent – 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.
“Good Morning America’s” Chris Cuomo was feeling sorry for borrowers and disparaging the stock market, which he called “legalized gambling” in an August 13 report.
“A 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,” said Cuomo despite the fact that the stock market hadn’t 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 – 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 “markets [were] about to crash” on “Today” August 10. CNBC’s Erin Burnett compared the similarities between 1987 and 2007, but concluded that ““a lot has changed” and that the mortgage problems “might not actually cause a crash.”
But Vieira kept pressing the question, asking CNBC’s Jim Cramer, “Are we headed for another Black Monday?”
Even Cramer, who had called the fixed income markets “Armageddon” earlier in the week replied, “Not even a chance … I think there’ll be a slowdown – I don’t want to say a recession—because of this problem.”
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 wasn’t exactly crashing.
CNN’s Ali Velshi reminded viewers of that on the August 13 “American Morning.”
“But you know, after all that volatility last week, after all ‘the sky is falling,’ take a look at how these markets did in the United States over the last week. The Dow was actually up.” Velshi continued: “Now 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. That’s not terrible. The sky’s not falling, actually. The S&P is only up about 2.5 percent and the Nasdaq is up above 5 percent.”
Likewise, ABC’s Bianna Golodryga had a calm perspective on the August 10 “Good Morning America.” She said most experts would agree with the president that a government bailout for mortgage defaults wasn’t a good idea, “saying that the market should correct itself.”
“But, Chris, we have to sit back and realize that even with all this volatility, we’re up 6.5 percent on the Dow this year and most industries are in the green,” she told Chris Cuomo.
Some programs featured experts who were able to shed some rationality on the situation as well.
The CBS “Saturday Early Show” August 11 brought on Greg McBride, senior financial analyst for bankrate.com. McBride counseled viewers about investing, explaining that people with 401(k)s shouldn’t 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 couldn’t refinance, he said, “This is not something you want to run and hide from. Particularly right now a lot of lenders have been empowered to do what’s 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 can’t afford those payments, contact your lender right away.”
‘Congress Never Touches Anything They Don’t Hurt’
While the media reports over the past week didn’t 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 “hashing out a narrow bill that may be the most serious response by Congress to the troubles rocking the mortgage market.”
Though not as extreme as several Democrats’ proposals to give borrowers a pass, that “serious response” would allow the Federal Housing Administration (FHA) to guarantee loans with no money down – one of the subprime lending practices that has fueled the mortgage mess.
The FHA is the “federal agency that guarantees home loans to people who may not otherwise qualify for mortgage insurance,” as The Hill described it. Senators are also looking at provisions that would raise the amounts the FHA could guarantee.
But The Hill’s Jessica Holzer noted “concerns that a fortified FHA could pose a risk to the taxpayers and crowd out private mortgage insurers.”
The government already puts pressure on lenders under the FHA’s “loss-mitigation program,” which aims to keep borrowers from getting foreclosed. A Housing and Urban Development spokesman made a revealing comment to Holzer: “Because we’re the government, we require the lenders to work with the borrowers to allow people to stay in their homes.”
Supporters of the free market say that government interference is not the right solution.
“Remember, Congress never touches anything they don’t hurt. They never intend to do that, but it turns out they can’t act fast enough in our modern economy to do any good as a reactive force,” 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.
“The main threat lies in overregulation and high taxation. That’s the main threat to the economy,” said Wolfram. “The real problem is not the lending market. The real problem is in the taxation and regulation policy.”
Staff writer Jeff Poor contributed to this report.