BOB GARFIELD:
From WNYC in New York, this is NPR's On the Media. Brooke Gladstone is out this week. I'm Bob Garfield.

On August 9th, the Dow Jones Industrial Average plunged 387 points on worries about defaults on so-called sub-prime mortgage loans. The panic was palpable.
[MUSIC UP AND UNDER]
MALE CORRESPONDENT:
Good evening. In plain English, the wings fell off Wall Street earlier today, and as the Dow Jones plunged down –
[OVERLAPPING VOICES]
FEMALE CORRESPONDENT:
The Dow plunged 387 points. Problems in the sub-prime mortgage market appear to be going global-
MALE CORRESPONDENT:
- today after Asian and European markets fell overnight. This after yesterday's 387 –
[OVERLAP OF CLIPS]
FEMALE CORRESPONDENT:
- credit crisis sent the Dow down 387 points —
BOB GARFIELD:
Financial stories have a hard time reaching the headlines, but sometimes it's easy. Dow up, good - Dow down, bad. Sure enough, a few days later, when central banks intervened and the U.S. Fed cut interest rates, stocks rebounded, the media expressed relief and went on to browner pastures.

But in failing to see the crisis coming and in quickly losing interest, was the media coverage of the sub-prime fiasco - sub-prime? Dean Baker, co-director of the Center for Economic and Policy Research, thinks so. The breathless reporting on market gyrations, he says, overshadowed the underlying problems.
DEAN BAKER:
Well, the basic story of sub-prime mortgage are that these are people getting mortgages who don't have good credit ratings. And what's going on is there's been a real explosion in the issuance of sub-prime mortgages over the last five or six years. They've been sub-prime for some time but they were generally a very small segment, 2, 3, 4 percent of the market. That just exploded, so that sub-prime mortgages account for 25 percent of all mortgages in 2006.
BOB GARFIELD:
But it was no secret before two weeks ago, when the Dow Jones went on the skids. Where was the reporting about the danger of sub-prime mortgages ‘til now?
DEAN BAKER:
Well, it was largely lacking. I mean, there were a few good stories here and there, and I'll single out The New York Times for having done some pieces about the sub-prime market and the risks it posed. But for the most part, the media was ignoring this, and it was a mass phenomena.

I mean, this was, as I say, hundreds of thousands, millions of sub-prime mortgages being issued. Clearly, there's hundreds of billions of dollars of that debt out there, and that's now going bad at a very rapid rate.
BOB GARFIELD:
You would have thought the dot.com bubble of the late '90s would have taught the financial press [LAUGHS] some lessons. How could they have failed to see the real estate bubble and the effects of bad loans?
DEAN BAKER:
In effect, they bought the story that this is different. They bought the optimism of the real estate industry that this was a good thing that house prices were going through the roof, that many low-income people that previously couldn't get homes were now buying them. This was all treated as a positive, without noting any of the risks associated.

We actually did a Nexus search in 2005-2006. The major source in news reporting on housing was David Lereah, who's the chief economist with the National Association of Realtors, and he actually wrote a book about why the housing boom will not bust and how you could profit from it.

Now, [BOB LAUGHS] you know, I don't object to anyone talking to David Lereah. He's a very knowledgeable person about housing. But the idea that he would be your sole source, which he was, in many, many cases, that's just irresponsible reporting.
BOB GARFIELD:
All right, now, let's come back to the current situation. The markets seem to have stabilized after the central banks intervened and the U.S. Fed cut the discount rates. What effect did that have? And, more importantly, did it really solve any of the structural problems?
DEAN BAKER:
Well, what it does is it, in effect, buys time. But the underlying problem is that you have, as I say, hundreds of billions - it could be over a trillion - you have an awful lot of bad debt in the form of mortgage-backed securities that is still being held.

And my concern on all this is that if the point of buying time is to allow the people who are holding that bad debt to sell it off to others who might be less well informed, that's not, in any obvious way, a good thing.
BOB GARFIELD:
Do you have the sense that the fact that the NASDAQ and the Dow Jones Average and the other major markets of the world recovered so much after the intervention of central banks, that the media have sort of taken their eye off the ball, and they say, well, this problem's solved, let's just move onto hurricanes and the political campaigns?
DEAN BAKER:
They tend to focus on mayhem in the markets, and that's sort of an easy story to tell, that the markets went up two percent on a given day. That's sort of an easy, simple story to tell, and you want the stock market to go up. That's kind of the theme of the story. And it's bad news when it goes down.

The underlying story, and that's really what they should be focused on, is what's causing very much worry that with the market, for the moment, at least, being somewhat more subtle today, that the underlying problem is going to be ignored.
BOB GARFIELD:
Can we assume on any given day that the market goes up, ah, that is unalloyed good, and the market goes down, that is bad? Is that assumption right to begin with?
DEAN BAKER:
No, not at all. I mean, you know, the market could be going up for a number of reasons, and one, let's say, is the good one. The economy's growing, and part of that story is that profits will be higher in the future. The market sees that and stocks are going up. That, I think, we could pretty much say is a good story.

On the other hand, profits might be going up for reasons that we may not think are good. Maybe workers are getting paid less. So if you own a lot of stock, of course, you're happy with that story, but if you're like most people and get most of your income from your wages, that's not particularly good news, so you probably shouldn't be cheering the Dow Jones in that case.

And the third case is simply an irrational movement, and we saw that. That was the story of the bubble in the late '90s. So, again, that was not, you know, particularly good, unless, you know, the only people that it was really good for were people who were speculating and smart enough to get out before the crash. But for the rest of us, it's very hard to see how that was a good thing.
BOB GARFIELD:
Dean, thank you so much for joining us.
DEAN BAKER:
Thanks for having me on.

BOB GARFIELD:
Dean Baker is cofounder and director of the Center for Economic and Policy Research in Washington, DC.