In yet another dispatch from the “everything is worse than you think” quarter, Floyd Norris, of the New York Times, writes today that the reason dividend payments from U.S. companies were so healthy in the years leading up to the recession was not because of excellent corporate performance but because of “lax lending standards.” Like American consumers, Norris argues, American companies went on a borrowing binge during the middle part of this decade, using debt to finance dividend payments and share buybacks. The healthy dividends that companies paid between 2004 and 2006 were not a sign “that corporate America was doing well,” but a sign that lenders were being reckless.

It’s an interesting argument. Yet the odd thing about Norris’s column is that he doesn’t include a single piece of data to actually support his argument. He asserts that companies were borrowing recklessly. Yet he doesn’t say how much money these companies borrowed between 2004 and 2006. He doesn’t show that companies that paid out hefty dividends took on more debt than companies that didn’t. Nor does he give us any evidence that companies’ current debt levels are historically high. Norris does show that companies paid out slightly more on dividends and share buybacks between 2004 and 2006 than they earned. But that doesn’t prove that companies were borrowing recklessly to finance dividends, because in 2004 companies were sitting on massive hoards of cash, so the dividend payments may have been simply a way of returning that cash to shareholders (which is what economic theory says companies should do if they don’t have better uses for it).

I think the reason the column doesn’t include any data is because the numbers don’t support Norris’s argument. While the financial sector was remarkably reckless in recent years, nonfinancial companies (that is, most American public companies) were, for the most part, disciplined. As a result, they entered this recession with what were, by historical standards, quite healthy balance sheets. At the advent of the 2001 recession, industrial companies in the S. & P. 500 had just $352 billion in cash and cash equivalents on hand. At the beginning of the 2008 recession, by contrast, they had $616 billion on hand.

Did companies amass those cash holdings via reckless borrowing? Historical comparisons suggest not. When the 1990-1991 recession started, nonfinancial companies’ debt was ninety-three per cent of their net worth. In 2001, it was sixty-eight per cent. For this recession, it was sixty-one per cent. And as a percentage of GNP, nonfinancial corporate debt was well below where it was in 2001. In other words, there’s little evidence that nonfinancial companies were taking on foolishly high levels of debt in order to pay off shareholders.

This doesn’t mean there wasn’t lots of senseless borrowing in the past six years: there was. But most of it was by consumers, investors, commercial real-estate firms, private-equity firms, and the like, not by American companies. The story that most nonfinancial corporations, in a desperate attempt to keep shareholders happy, got caught up in the same borrowing frenzy the rest of us did is a good story. It just happens not to be true.

Continuing yesterday’s discussion of the future of the newspaper business generally, and of the New York Times specifically, a friend of mine remarked recently on the fact that newspapers have never taken advertising seriously. Of course, they’re serious about the advertising they print, and I presume they hope that their advertisers believe that big ads work to garner customer interest and move merchandise. But when it comes to promoting themselves, newspapers have historically been almost completely uninterested. This is especially peculiar when it comes to the Times, which has an exceptional brand (one of the few genuinely powerful and long-lived brands in corporate America, I would argue) and an exceptional product, but which seems to view advertising that product as of only minor usefulness.

I realize the Times does run those klutzy TV ads featuring ordinary people talking about the pleasure they get from reading the Sunday paper or whatever, but those are ads that just about any newspaper could run about itself, and they do very little to build on the distinctive authority that the Times has. Maybe I’m wrong, but I assume that a significant percentage of political, economic, and cultural movers and shakers are regular readers of the Times. Yet I’ve never seen any of them in an ad for the paper. (Perhaps those ads exist, but if so, I’ve missed them.) Nor has there really been an ad in recent years that’s made the kind of case I made yesterday for why reading the print edition of the Times is such a grea—and irreplaceable—experience.

Now, it may be that there are church-state issues (in terms of the separation between advertising and editorial) that prevent a paper like the Times from using big names (the kind of names the paper is likely to write about) to sell itself, although such concerns strike me as not very sensible. (The paper features ads from Macy’s and Bloomingdale’s, but doesn’t have any trouble writing critical stories about those companies.) But I also suspect that part of the refusal on the part of papers to think creatively about how to advertise themselves is the product of a longstanding sense that that kind of self-promotion is suspect or beneath them—that the Fourth Estate shouldn’t have to sell itself to readers. Given the newspaper industry’s current economic woes, I suspect that that sense is fast disappearing. But maybe not fast enough.

My friend and colleague John Cassidy has been one of the more bearish commentators on the U.S. economy for the past decade, which also means he’s been right more often than he’s been wrong in recent years. Given that these days even bulls are predicting a prolonged and deep recession, you might imagine that John’s take would be even more ursine than usual. But in the new issue of Portfolio, he actually switches gears, suggesting that, while the short-term outlook is going to remain dismal for months to come, he’s “less pessimistic than the conventional wisdom.” So much so, that recently he actually bought some stocks. (For John to do this is the rough equivalent of Larry Kudlow opposing a tax cut.)

Now, just because a pessimist has become an optimist (albeit hardly a giddy one: John suggests only that the U.S. economy will start to grow before the end of this year), that’s not a sign that he’s necessarily right. But even if you set aside the economic analysis in the piece, the important point it makes is that the danger of extrapolating from current trends exists just as much on the downside as it does on the upside, and that just as in at the height of a bubble people have a hard time imagining that it will end, at the depths of a downturn it’s easy to assume that it will last forever.

I think extrapolating from the present is especially difficult in the current case, because of the incredible speed with which the economic crisis in the real economy occurred. While the U.S. economy has been weak for more than a year, it was limping along tolerably well until September, when the failure of Lehman Brothers, the resultant freezing up of the credit markets, and the failure of Congress to pass the first version of the TARP sent it into shock. Now, it may be that this happened because everyone in the U.S. suddenly realized just how flimsy the state of the economy was. But it seems more likely that it occurred because the fear engendered by the bursting of the housing bubble and the turmoil in financial markets created a massive liquidity crisis—investors simply wanted (and want) to have their money in cash or government bonds, rather than to lend it. And if that’s the case, then it’s possible that having the government pour liquidity into the market (as it’s been doing), and taking steps to remove that fear and restoring investors’ confidence, could get the economy moving again much sooner than we expect.

This seems like a good description of the absurd run-up in property prices between 2003 and 2007:

The vacant lands in and about our cities and villages have risen, in many instances, several hundred per cent…more by the competition and speculation than any real demand resulting from the increase in our population and actual prosperity.…Most have been purchased, not for the purpose of being occupied by the buyers, but to be again put in the market, and sold at still higher prices.

It’d be an exaggeration to say that “most” of the properties bought in the past five years were purchased by speculators who were simply looking to resell them at higher prices, but many were. Aside from that, this passage captures the dynamic of the housing bubble quite nicely, particularly as it operated in places like Phoenix and Las Vegas. The punchline, of course, is that this passage isn’t from 2006. It’s from 1836, just before the Panic of 1837, which devastated the U.S. economy much as the crash of 2008 has, hit.

The bloggers at Free Exchange (until today, I wasn’t sure there was more than one, but the references to “my colleague” cleared things up for me) have a couple of nice posts in defense of speculation, both generally and specifically with regard to credit default swaps (CDS), which have become one of the great bête noires of this financial crisis. I’m going to write more about CDS in the coming week, so for now I just want to highlight the notion that speculators can actually add value by increasing the amount of information in the market:

Bets made for profit provide crucial information to markets. If everybody on the street is insuring one guy’s house, it may be because they think his house is in danger of burning down. This should be a pretty strong signal to the neighbour in question that his barbecue pit is too close to his porch (or some such thing). A financial derivative that improves the flow of capital, perhaps by providing the marketplace with better information, is worth having, even if some people make money buying and selling it for profit.

The point isn’t, obviously, that markets are perfect information processors, or that speculation doesn’t sometimes lead to frothiness. But markets can do a good job of aggregating lots of small pieces of information in order to provide useful signals about the future. And the Free Exchangers are right that if you restrict access to or limit the number of players in a market (by, say, kicking speculators out), you’re actually likely to make the market less intelligent, and less useful. (Needless to say, I’m biased in favor of this argument, since I wrote a book called “The Wisdom of Crowds,” which argues in part that adding more people and more diversity of opinion to a group (like a market) is likely to make it smarter, not dumber).

I would argue, in fact, that one of the problems, during the time of the housing bubble, that helped provoke the current financial crisis is that it was too difficult for people who thought that there was a bubble to have their opinions count. I registered my opinion that housing prices were too high by renting instead of buying, but there was no easy way for me to bet that housing prices were going to go down. (I could have bet on the Case-Shiller Housing Futures Market, but that’s still a very small market.)

On the flip side, one of the big problems with the toxic mortgage-backed securities that are now clogging up bank balance sheets is that there is no real, liquid market for them, not just because people are afraid to invest, but because each of the securities is so specific that it’s hard to buy and sell them like stocks and bonds. As a result, the “market” price for these assets doesn’t reflect the collective judgment of investors. It just reflects whatever price the few players in this market are willing to pay. In this case, too, the market isn’t aggregating enough information because it has too few participants. In the end, if we want markets to work well, we want them to be bigger, not smaller. Even if that means letting speculators through the door.

Felix Salmon has a smart riposte to Michael Hirschorn’s new piece in The Atlantic, in which Hirschorn provocatively suggests that the Times, at least in its print incarnation, could be out of business by May. Hirschorn’s obviously right that the newspaper business is in serious economic trouble, and that the migration of readers to the Web has serious implications for the production of high-quality journalism—as someone else argued recently. But as Felix says, because the Times is only losing a small amount of money at this point, and because it’s one of the few newspapers that has a national presence, “I think it’s pretty safe to say that the NYT is going to continue to exist in its present form for quite a long time yet.”

It’s possible, of course, that my skepticism about forecasts of the impending death of the Times is simply the product of wishful thinking, since I am one of those dinosaurs who finds the idea of a morning without the print edition of the Times pretty much unimaginable. Just yesterday morning, in fact, I was quite powerfully struck by the tremendous variety and detail of information that a single day’s edition of the Times offers, and by the—clichéd, but nonetheless true—fact that reading, or at least skimming, the print edition cover to cover guarantees you’ll come across stories that you may not have thought you were interested in but in fact are fascinated by, like the reclassification of Tule elk as a target species for bowhunters (just imagine how that news was received in the Tule elk community) or the constitutionality of animal-cruelty videos. And yes, the Internet offers these things as well, but, I have to say, nothing quite offers the unusual combination of comprehensiveness and serendipity of the Times’ daily edition. It’ll be bad news when it’s gone.

Tyler Cowen, in his ongoing effort to ensure that the government spends as little as possible in its attempt to stimulate the economy, cites approvingly a post by Arnold Kling arguing against a big fiscal-stimulus package, because the risks vastly outweigh the potential rewards (actually, Kling doesn’t really think there are any potential rewards from a stimulus plan). Kling enumerates those “risks” in a list. This is not a very useful list, because it contains absolutely no evidence for any of his assertions—he simply assumes the existence of his risks to be a fact—and no assertion about how likely any of these “risks” are, which makes it a little hard to do a cost-benefit analysis. Kling says that “on close examination,” the case for stimulus is weak, but, in this post, at least, he offers no such “close examination,” merely a laundry list of familiar (and unproven) criticisms of government spending.

The most curious thing about Kling’s post, though, is the way he closes—namely by complaining that even though he and his side “have logic on their side,” they will be “mocked and vilified in the media” for their opposition to a big stimulus package, and that that package will be pushed through as a result of “elite groupthink”—the same groupthink, in fact, that pushed through the Paulson rescue plan. The implicit assertion here is that the support for a stimulus package, as for the rescue plan, is driven by this élite group of interventionist economists and politicians, who are overriding what would otehrwise be commonsense economic policy.

What’s odd about this is that the support for the stimulus package, as well as support for the Paulson plan, hasn’t just come from liberal economists or Democratic politicians. On the contrary, among the biggest supporters of both have been the world’s investors, at least insofar as their collective judgment is reflected in market prices. As I showed yesterday, investors overwhelmingly supported the Paulson plan: it was only when it was killed, that stock prices really started their downward spiral. And it was only after Obama unveiled his economic team and made clear how big his stimulus plans were that the market began its sharp recovery (the S. & P. 500 is now up twenty-five per cent since Nov. 20th). And as The Economist’s mystery blogger noted yesterday, anyone’s who’s paying attention to the stock market knows what would happen if Obama announced today that he was abandoning his plans for a major stimulus package:

Markets would plummet, with significant knock-on effects, based on the actual news that government spending would not nearly close the American output gap, but also given the signal that America was no longer committed to serious stimulus.

The point is that it isn’t just some group of pointy-headed Keynesians saying that a big stimulus package will be good for the economy: the collective wisdom of the market is saying the same thing. And it seems peculiar for a supposed believer in the efficiency and intelligence of markets—which, as a libertarian economist, I assume Kling is—to simply disregard what the market is saying in this case. In effect, libertarian economists are saying that they have a better sense of what’s good for the economy than the aggregated wisdom of investors does. And that makes them sound peculiarly like the Platonic economic planners that they typically decry.

I realize this is about as Old Media as you get, but it’s remarkable how little attention CBS is receiving for its almost complete domination of primetime viewing. Last week it had nine of the top ten shows, with the sole exception being football on NBC. The week before, it had nine of the top ten again (although for some reason, Nielsen counted the pregame show on NBC as a separate program), and fourteen of the top twenty. And the week before that, it also had, yes, nine of the top ten shows.

Some would say, of course, that being the dominant player in network television today is akin to being the dominant provider of vaudeville entertainment in 1920 (although I’m not one of the ones who would say that). Nevertheless, it’s hard to think of another industry with a small number of competitive players, in which one player is so thoroughly dominating its competitors in reaching customers. (CBS still has the problem, from an advertising perspective, that its viewers tend to be significantly older, but in recent weeks, it’s also actually won the “coveted” 18-to-49 demographic.) There is a logic to this success: CBS’ successful shows tend to be formulaic (I mean that descriptively, rather than derogatorily), featuring self-contained episodes that wrap up nicely each week— meaning that people don’t have to worry that, if they miss a week, they’re going to be lost. CBS has also resurrected the traditional American sitcom, and it’s done an excellent job of expanding its “CSI” franchise without diluting it. Even so, it’s a tremendous feat. It’ll be interesting to see if CBS’ success lasts once the new TV season begins next week.

When it comes to understanding how the current financial crisis erupted, one of the important questions is, To what extent did the people who worked for financial institutions persist in reckless behavior because that’s what their own individual self-interest and short-term market pressures demanded, even though they knew they were in a bubble in which their models for measuring risk were not very useful?

Joe Nocera’s long article in Sunday’s New York Times Magazine, on the virtues and vices of Value at Risk, the risk-management model that most financial institutions use to attempt to quantify how much risk they have on their books, obliquely sheds some interesting light on this question. Nocera’s argument in the piece, crudely summarized, is that the financial crisis wasn’t created, as some have argued, by the limitations of the “Value at Risk” model—the most important of which is that it’s only valuable in measuring risk in relatively normal, liquid markets. Instead, the crisis was created by Wall Street’s failure to recognize that sometimes normal, liquid markets break down, and when those breakdowns occur, they can cause unimaginable amounts of damage. In Nocera’s take, Wall Street simply got careless, and “stopped looking for dragons,” at which point it was doomed.

I think there’s something to the idea that many bankers simply started to believe their own hype and to overlook the possibility that anything truly bad could happen, particularly in the housing market. But there is one very interesting passage in Nocera’s article that suggests a different conclusion. Ethan Berman, the C.E.O. of RiskMetrics, a big risk-management consulting firm, told Nocera that one of Value at Risk’s biggest flaws is that it didn’t measure the risk of a liquidity crisis—the risk that most of the players in a market will suddenly want to hold onto cash rather than have their money invested, leading to a rapid drying-up of demand for all kinds of assets. This was a big problem because, as Nocera says, a liquidity crisis is what we’re in the middle of. Nocera’s conclusion: “One reason nobody seems to know how to deal with this kind of crisis is because nobody envisioned it.”

The odd thing, though, is that the most famous quote to emerge from the crisis so far came from Chuck Prince, the C.E.O. of Citigroup, who, in July of 2007, said to the The Financial Times:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.

Read that again: “In terms of liquidity, things will be complicated.” That sounds like someone who realized that there would be a drying up of liquidity, and that things would be ugly as a result, but who decided that it didn’t matter. That isn’t to say that Chuck Prince saw how bad things would get, or that he really grasped the magnitude of the risks Citigroup was taking on. But it does suggest that much of the problem on Wall Street wasn’t that people stopped looking for dragons. It was that even when people recognized the possibility of dragons, they decided it was in their short-term interests (even if it wasn’t in the company’s interests), to run the risk of getting incinerated anyway.

This description of Walter Rostow, a legendary economic historian and one of the most ardent Vietnam hawks in the Kennedy Administration, by McGeorge Bundy seems like it could be used to describe many of the ideologues that you find in such profusion on the Web:

[His] view of the world is always complete, three-dimensional, graphic, and wrong.

That’s from Gordon Goldstein’s very interesting book on Bundy, “Lessons in Disaster.”