Expertise mission creep datapoint of the day

By Felix Salmon
November 23, 2010
appeared on Tech Ticker with Henry Blodget; he said, in the accurate if sensationalist words of the Business Insider headline, that CALIFORNIA WILL DEFAULT ON ITS DEBT.

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Last week, Chris Whalen appeared on Tech Ticker with Henry Blodget; he said, in the accurate if sensationalist words of the Business Insider headline, that CALIFORNIA WILL DEFAULT ON ITS DEBT.

The interview was actually pretty intelligent and informative, by the standards of financial TV. Whalen talked about the politics of federal-state relations; about prior cases where states defaulted; about California’s pension obligations; about the ability of a Republican-controlled House to pass any kind of bailout bill—all things which are decidedly germane to anybody looking at California’s credit.

But Brett Arends didn’t like what he was hearing, and decided to push back a bit. The results were much more illuminating than anything Whalen said on Tech Ticker.

When I e-mailed Whalen, asking him for specific calculations, none were forthcoming.

“My general comments have to do with my guess as to the impact of mounting foreclosures and flat to down GDP on state revenues,” Whalen replied.

Your guess? These are important problems, to be sure. But do you have any actual numbers?

“Revenues fall and mandates rise to the sky,” he wrote. “You do the math.”

Er, no, actually. It’s your assertion. You do the math.

Whalen blamed the matter on Blodget.

“I am a bank analyst,” he wrote. “I have not written anything on this. My comments have taken on a life all their own… This is all Henry’s fault.”

Henry’s fault? Not really: Henry wouldn’t have started asking Whalen questions about California if he didn’t already know pretty much what the answers were going to be. And Whalen was clearly prepared for Blodget’s questions.

In reality, what we’re seeing here is expertise mission creep, and a rare example of an expert admitting to it. Whalen’s company is highly regarded when it comes to analyzing banks’ balance sheets, and as a consequence of that regard, Whalen has gotten for himself a nice perch in the punditosphere, as well as a new book.

But Whalen, as he admitted to Arends, is no more an expert on municipal finance than Freeman Dyson is on global warming. And so the proper stance for Blodget to take was not to deferentially pose questions to Whalen and then passively receive his oracular words of wisdom, but rather to push back and have a proper debate about Whalen’s assertions, much as Arends might have done.

The California debate is an interesting one: the state has massive future liabilities, in the form not only of debt payments but also of public-sector pensions, but at the same time its legislature is incapable of raising taxes in order to ever pay for them. It’s a fundamentally unsustainable status quo—something has to give—but realistically no one knows what will give, or when, or how. It might be those debt payments, but a debt default wouldn’t really solve California’s problems, since California’s debt isn’t actually all that large, as a percentage of GDP.

More generally, the municipal bond market is a very complicated place, where expertise is hard-earned and voluble new entrants are inherently mistrusted, normally for good reasons. (See Bond Girl on Meredith Whitney; she doesn’t even mention the conflicts inherent in having a rating agency give investment advice.)

But complex doesn’t play well on TV; strongly (if briefly) held opinions do. So, as ever, expect more heat than light whenever you see an expert on TV talking about anything.


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Pure and simple, TV = entertainment. Hope you were entertained? Hope you didn’t expect to be informed.

That said, this is a pretty common trick. Surely you studied it at some point?

Host wants to say “XYZ” for the entertainment value, but doesn’t want to sacrifice “journalistic integrity”. Host finds random guest, asks guest to say “XYZ”. Guest complies. Host reports, “Guest Expert says XYZ.”

Everybody happy, viewers entertained.

Posted by TFF | Report as abusive

I was even less impressed with Arends’ shrill rebuttal, however. I might almost reinterpret his counterpoint as “if I am adamant enough, I must be right.”

Posted by Curmudgeon | Report as abusive

Any sort of pushback on interviewees should be applauded these days. Too often they simply spout assertions/opinions as fact and occassionally support it with an unsourced statistic. What is unfortunate is that the Arends/Whalen dialogue will never get as much attention as the original Blodget/Whalen dialogue did, which inadvertently demonstrates the foundation of the Fox News business model.

Posted by HotPanini | Report as abusive

Arends is to be commended for an excellent article. It made me re-examine my viewpoint. California’s epitaph is very premature. They lead us in innovation and they feed us in a big way. Their economy is powerful and we should be thankful for their contribution.

That said, Arends glosses over some things. California is not Germany, as Arends claims. California households are deeply in debt, often underwater on homes with very high mortgage payments. They have sky high unemployment now, and their economy over the last decade was on an unsustainable debt-fueled binge. As we have seen across the world, the debt-fueled party comes first and the long, painful reckoning comes next. Arends takes his statistics from the party.

Merideth Whitney ranked California at the bottom of all major states in its fiscal situation.  /meredith-whitney-plans-report-on-weak- health-of-u-s-states-fortune-says.html

Yes California taxes are low now, but they seem certain to be going much higher, since state budget numbers must add up. Many other states will not need this kind of adjustment.

I think the real verdict is years away. California has years of tax increases and spending cuts ahead and we have seen what that has done to countries such as Ireland and Spain.

Posted by DanHess | Report as abusive

California leads WHO in innovation?

Oh, wait, you probably aren’t from the same state that I am. :) Yeah, California does a pretty good job in that department.

What so much of the analysis neglects, however, is that sovereign default (and governmental default in general) is a political decision more than a financial decision. If California can muster the political will to repair their finances, then they can easily avoid default. If they cannot, then nothing can help them.

So it all comes down to a bet on California politics. They should have interviewed a political commentator, not a bank analyst.

Posted by TFF | Report as abusive

I don’t see how they get from budget shortfall to default? The ‘juice’ they pay is roughly $6B in a $85B budget… the gap is about $25B! Defaulting would only be a drop in the pan of a single year’s shortfall, and so wouldn’t serve any purpose except to curtail their ability to borrow tremendously.

The talk of Cali default is dumb, but discussing the shortcomings of California legislature and budget practices DEFINITELY warrants more conversation.

Posted by CDN_finance | Report as abusive