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June 7, 2009
David Warsh, Proprietor


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Landing on Those 240 Inches

An Air France flight with 228 persons on board, en route from Rio to Paris, disappears in a mid-Atlantic thunderstorm without so much as a farewell call of distress – a nearly perfect specimen of bad news, at least for a certain class of people. How is it that, within days, we receive a satisfying provisional explanation of what may have happened? How is it that this explanation spreads around the world and is modified in turn? Why do we expect that such an accident won’t happen again, to us?

Last week’s crash is a case study in how we deal with tragedy arising from high-tech failure. It permits some quick arithmetic on where people get their news. It offers some clues, even, to the future of the newspaper industry. It also affords some lessons on how to deal with much more complex catastrophes – the continuing economic crisis, for example.

First, the regulatory authorities: within hours, a team of international experts were on the scene of rescue operations in Recife, working to determine what could be known. It may be months, of course, before we know about whatever conflicts occurred among overlapping jurisdictions then; every fan of police procedurals knows the potential of things here to go wrong.

What commonly goes unnoticed is the spectacular success over the last forty years of the US National Transportation Safety Board and its counterpart organizations around the world in quickly establishing provisional truth in aviation accidents and then assiduously following up, improving air safety in the process. Created by Congress in 1967 as an independent agency whose funding flowed through the Department of Transportation, the NTSB was further insulated from political control in 1975, when it was removed from the department altogether. Its career investigators are considered among the best in the world.

Thus, six days after the crash, we know all about telemetry by which airplanes automatically report operating data via satellite; about the Pitot tubes with which they measure their speed; about June weather in the horse latitudes; the depth of the ocean there; the pattern of the search; the French nuclear submarine that has been dispatched to search for the cockpit recorder; the frictions between the French and Brazilian authorities investigating the crash – about how little of the sequence of events is yet known. We know something of the steps that Air France is taking to install new speed gauge tubes on its longer-haul planes.

We know all this because most of the protocol was negotiated long ago, spread around the world by treaty, and refined over the years: the prompt and relatively full disclosure of what can be said with some certainty to the wire services, the major newspapers and broadcasters and the trade press; the well-established agreements among reporters about careful attribution and respect for fundamental ambiguity where it exists; the immediate amplification of news via airwaves and the Web. Twice-a-day press briefings are the rule at the on-site headquarters and pool reports by journalists from the disaster site.

What next? Having passed through the filter of official release, the story becomes fodder for gossip, talk shows, blogs, magazines. There is nothing linear from this point on. A tip that might change the story could come from anywhere. Sleepless pilots? Wasps nesting in a Pitot tube? Electromagnetic interference? The stories of other aviation disasters have been illuminated by discussion originating in venues of all sorts, bottom-up and top-down.

Whatever the theory might be, eventually it must seek to make its case in NTSB circles, even when the Americans serve only as friends of the court to other agencies, as in the Air France crash. And however feverish the speculation, it doesn’t become news until the story arrives again at the last place an airliner wants to land – the 240 square inches known around the world as the front page. Such is the stylized architecture of news.

What in this arrangement is likely to be supplanted as a result of the technological earthquake that has been shaking the foundations of the newspaper business in recent years? Very little, I submit. The distress of the major US newspapers has been greatly exaggerated. Dean Singleton, owner of a large chain of newspapers, noted the other day that most of the commentary fails to distinguish between structural change and the pain of a severe cyclical downturn.

Some of the advertising that has supported newspapers in the past is gone forever, but much of it will return when the recession ends. Readers will pay a larger fraction of the cost in the future, for both the paper product if they wish it, and its online version, which will become an increasingly important adjunct to the printed word. Overall revenues will shrink somewhat, and so will the quantity of news presented. Publishers will carefully weigh the cost of printing and distributing paper copies against other opportunities.

But most well-established newspapers will continue to be the most authoritative sources of news in however extensive a realm they are able to make their own, even as alternative formats proliferate. The biggest newsrooms will be theirs. The channels of distribution are more various than ever – the other day the American Society of Newspaper Editors quietly dropped the “paper” from its name. But the hierarchy of authority will remain intact.

So what are the implications for economics and finance? Obviously, an unanticipated recession is a hugely more complicated event than an airplane crash. Still, there are certain parallels.

Take regulation, for example. Nearly everyone now agrees that the regulators of the financial sector require far better instrumentation and coordination mechanisms than they currently possess: clearing houses, reporting requirements, counter-cyclical capital ratios, risk maps, and so on. Andrew Lo, of the Massachusetts Institute of Technology, a preeminent expert on securities and derivatives, last fall urged the creation of an investigative unit specifically modeled on the NTSB. Such an independent Capital Markets Safety Board would pay its career staffers Wall Street salaries in order to avoid the temptations of the revolving door, and send them in any time a financial entity’s collapse threatened the stability of the system – the Bear Stearns real estate hedge funds whose collapse in June 2007 lit the crisis fuse, for example.

Why the NTSB parallel might mislead can be seen in what was practically the first observation on the current crisis, and that is still about the smartest. In those days, former Federal Reserve Board Chairman Paul Volcker and former Treasury Secretary Nicholas Brady recommended the creation of a new version of the taxpayer-funded Resolution Trust Corp., which liquidated the bad loans of myriad saving and loan institutions that had gone broke in the late 1980s and early ’90s.

The trouble was, said Ira Artman, a mortgage-backed securities trader until the crisis brought him low, that in the earlier crisis the S&Ls had already gone bust. They resembled airplanes that had crashed, and the Federal Deposit Insurance Corporation had statutory responsibility to clean up the site – in this case not to bury the bodies, but to take over and sell off their troubled assets

In the current crisis, Artman continued, the banks resemble planes still in the air, circling and hoping to land. To some on the ground, they might appear to be low on fuel, i.e., have solvency problems, but no one could prove the point unless they were, if effect, forced to crash. Meanwhile, for a variety of reasons, the Treasury Department was determined to recapitalize them on the fly which is to say refuel them, as needed, and to bring them in for a safe landing.

Hence “stress tests” and the Treasury’s public-private Legacy Loan and Securities Programs, overseen by the Federal Deposit Insurance Corp., intended to purchase $500 billion or more of troubled assets from the biggest banks. Who wants investigators peering over their shoulder in emergency operations like those? Financial forensic units at the Federal Reserve Board and whatever other regulators emerge will doubtless be beefed up considerably, but not on the autonomous model of the NTSB. (Artman has kept up a steady stream of excellent commentary as Sterling Slivers at MortgageNewsclips.com.)

And the newspapers? They’ve done a very good job of covering the disappearance of Air France Flight 477 — one story among the hundreds, perhaps thousands, that they are following. What lessons might they draw from the relative success of aviation safety regulation to apply to the larger sphere? A measure of confidence, for one thing, in their own abilities to cooperate with regulators in order to arrive at broadly persuasive accounts of what happened and why. A measure of consolation, for another, when they reflect on how much more thoroughly do aeronautical engineers and even meteorologists understand their world than do financial engeers and economists. Students of the news industry have lost their composure. Once they regain it, they will recognize that the traditional leaders, at least among the national papers, are unlikely to be supplanted.

The newspapers – in all likelihood we will continue to call them that — can do a much better job of covering economic and financial matters than they do now. Probably they will improve. As they do, they will map more accurately and then cover the remarkable array of non-traditional online media that have begun to appear. The complicated new landscape of the news will become clearer and more familiar in due course.

A word, therefore, in conclusion, about what we do here. Economic Principals was for many years a newspaper column in The Boston Globe, before it became an online weekly. It took a while to discover the reader-supported mechanism by which it exists today, based on the model of public broadcasting. A relative handful of subscribers pay $50 apiece, perhaps as few as two or three hundred from year to year, so that today more than 35,000 readers in 120 countries around the world may follow along. Circulation continues to increase.

Even when it was backed by the prestige and resources of a large and successful newspaper, EP didn’t break a lot of news destined for the front pages. Instead it alternated between providing context and conducting a semi-systematic reconnaissance of technical economics, much as it does today on a more modest scale. Such beat coverage itself is a form of news-gathering, especially inasmuch as it is supplemented by occasional books.

More than ever, EP’s hallmark is its independence, and there are exceptions to the no-very-big-news rule. The obvious example is its coverage of the long and complicated aftermath of Harvard University’s failed mission to Moscow in the ’90s, on behalf of the Clinton administration. Expect that sort of coverage to continue. It’s a small contribution to one part of the mission of the Fourth Estate – to help us to avoid making the same mistakes twice.

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