September 22, 2008

Does CNBC Cause Market Volatility?

Books will be written about this financial crisis, but no one has brought up one important factor,  and it is summarized by this single soundbite, from Friday September 17, 2008, at exactly 4:00pm EST:

"...and there's the closing bell, I'm Bob Pisani, and I just have to say in my 18 years at CNBC, I have never been more proud of my news team than I am now...."

They are good reporters, dedicated and hardworking, I'll give him that, but was the reporting itself better than it was on other days?  What else would there be to be proud of?

The problem, as everyone on CNBC reminds, is one of liquidity, not solvency.  In other words, the financial institutions have money, but are overleveraged.  As long as no one calls in their loans, as long as there isn't a run on the banks-- as long as these institutions are given time, then they can rise the capital, or deleverage.  They just need time.

Bear Stearns didn't have time.  FNM, FRE-- no time.  Maybe in a year housing prices rebound?  No one can wait that long.  Etc, etc.

And so one must wonder what part CNBC and the media in general played in this very real catastrophe. Maybe if the media hadn't been reporting about-- sensationalizing?-- financial Armageddon so zealously, perhaps there wouldn't have been a run on money market funds, calls to congressmen about the safety of their pensions, etc-- and maybe the institutions could have had-- what, another month?  Two weeks, even?  AIG held out until the end, defiant, until the government kicked them in the head to roll over.  What could they have done in another two weeks? 

Who knows?

It's hard to say what relationship there is between, say, CNBC's ratings and measures of market volatility:

cnbc and vix.jpg

Oh wait, never mind, it isn't that hard after all.

In case you can't see it, here's the same graph with the CNBC ratings data shifted two days:

cnbc shifted.jpg

The greatest monetary shift in this country's history is real.  But, as with politics, science, law, medicine and the arts, we don't interpret reality, we interpret other people's interpretations of reality. 

Which is why I say: America hates the red pill.

(Data above from


To be clear, I am not bl... (Below threshold)

September 22, 2008 3:28 PM | Posted by Alone: | Reply

To be clear, I am not blaming the reporters, they are obviously reporting the news well, and they work like dogs-- are Faber and Rattigan on 24 hours a day?

But it's the way it's reported: when they do an interview from the floor, there's a lot of background noise-- but that could easily be blocked out, but they choose to leave it in to give sensations of the busy trading floor.

I wonder how this particular disaster would have played out in 1929.

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Blaming the media for the f... (Below threshold)

September 22, 2008 3:48 PM | Posted by Jason: | Reply

Blaming the media for the financial meltdown is like blaming the bible -- and not the idiots holding it -- for religious persecution. And to say that CNBC influences the financial markets is, by several orders of magnitude, giving them too much credit.

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Footnote: graphs taken out ... (Below threshold)

September 22, 2008 9:05 PM | Posted by Anonymous: | Reply

Footnote: graphs taken out of his ass until further notice.

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Ok, you have a point.</i... (Below threshold)

September 22, 2008 9:53 PM | Posted, in reply to Anonymous's comment, by Alone: | Reply

Ok, you have a point.

I got the CNBC ratings for the last two weeks from this site, and went through day by day and entered them into a spreadsheet. I got the VIX data from Yahoo!, and entered those into a spreadsheet, and then made the graph.

You might want to ask why I entered them by hand, instead of by some automatic process; the answer to that is that I have no idea how to do it automatically.

To reiterate: I am not saying CNBC caused this. But this crisis is/is analogous to a bank run. If you hear your bank is going to run out of money, you try and get yours out fast. But if word is spreading very fast that the bank may not have money and there may be a bank run, then there will, indeed, be a bank run.

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My training is in history a... (Below threshold)

September 23, 2008 9:49 AM | Posted by Diane Abus: | Reply

My training is in history and as a foreign observer,I must say the country there will be better off with the gov more "involved in the $, of the nation.(free enterprise also has its limits.).Should be an interesting ride.your congress seems to have it right.and you seem a little picky about the broadcasting.the big picture with the bailouts shows a little "foucaultian" visionne,in my opinion.

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Coloration does not infer c... (Below threshold)

September 23, 2008 10:07 AM | Posted by Anonymous: | Reply

Coloration does not infer causality.

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You have touched upon the p... (Below threshold)

September 24, 2008 1:18 AM | Posted by sidhartha: | Reply

You have touched upon the problem of free accessibility of all information. Has anyone worked on the problems that this can lead to in the case of markets.

There is a centralized supply of money (fed). Everyone hears and comes to believe that real estate is not a good investment at this time, regardless of it being true or not. Everyone freezes and then what happens when the good times are announced? Everyone wants to crash the party. I think that this centralization of money supply and the collective awareness of it is just unworkable.

It cannot be denied that there are two major players in this : the free market (or what remains of it) and the media.

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