Shoot the Messenger

It seems certain people do not like bad news.   In December 2010 Meredith Whitney offered her opinion on 60 Minutes that 50-100 cities may default on their bonds in 2011 or early 2012.  For those of us who do not spend our time poring over the details of public sector financing, this may seem like a non-event.  No great shakes, just part of the spate of bad news generated by a moribund economy.  To others, Whitney has committed a cardinal sin.

The attacks on Meredith Whitney represent a curious phenomenon.  How much does opinion affect the reality it addresses?  Whitney’s opinion, to which she has every right, seems to have stirred things up.  It is impossible to tell how much her statements have caused investors to pull out of municipal bonds, but they continue to do so, much to the chagrin of many an analyst, investor, and politician.  In fact, Congress wants to have a little chat with her.

Whitney could be right again.  She is the one who pointed out potential problems with Citigroup in 2008, contrary to the then-current orthodoxy.  She could be wrong as well.  Municipal bonds might not be in trouble at all.  Analysts have different opinions.  All together now: Duh!  So why is Congress ticked off and why do mayors and city managers want her head on a platter?

No matter what eventually transpires, the people in whose interest it is to paint a rosy picture will say everything is just fine.  After reading the book Too Big To Fail, I remembered why.  Markets can be affected significantly, sometimes catastrophically, by rumor or the opinions of people perceived to be in the know.  Management of the meltdown of 2008 was in large part an exercise in keeping the markets from being spooked.

There is a problem with this, though.  If I get a whiff of smoke in a crowded theater, good judgment dictates that I check it out before standing up and shouting for everyone to evacuate.  The panic may cause harm that would not have come without my overreaction.  On the other hand, if flames are licking at my posterior, failing to announce that fact could cause harm.

Government and investors with holdings in a particular financial sector or business have a vested interest in everyone else believing things are OK.  Their interest, put bluntly, is to leave the theater just in time and just ahead of everyone else.  Do not expect either of those types of folks to give us a fair warning before solid waste hits the breeze generator.

That is why I am more inclined to at least pay attention to Whitney’s warning.  I have suspected for some time that things are much worse than we are being told by our leaders.  Whitney may have a better nose for smoke than I do.  I would rather miss part of the movie on her false alarm than become a crispy remnant during the love scene.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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