How to fix Facebook

Mark Zuckerberg can do more to improve a social network that was meant to build communities but has helped to split societies

John Thornhill

Facebook provides a fun, free and remarkably popular service to 2.2bn users around the world. But the downside, and it is a very big one, is that the social network has opened the door for extremists, propagandists and spies to hack democracy.

One of the most damning charge sheets against Facebook — and other social media companies — was laid out recently in a British parliamentary report on disinformation and “fake news”. “Our democracy is at risk, and now is the time to act, to protect our shared values and the integrity of our democratic institutions,” it concluded.

Social networks that were designed to build communities have all too often been used to split societies. A report this year from the Oxford Internet Institute found evidence of organised social media manipulation campaigns in 48 countries, compared with 28 last year. These campaigns are also spreading to other platforms: in the developing world many of them run on chat apps, such as WhatsApp, Telegram and WeChat.

Facebook has finally abandoned its happy-clappy rhetoric that it was always the solution rather than the problem. The company now accepts it must take more responsibility for user content. It is also stepping up scrutiny of advertisers.

Last week, Facebook itself flagged a co-ordinated disinformation campaign by “inauthentic” users to influence the US midterm elections. In an earlier interview with Recode, Mark Zuckerberg, Facebook’s chief executive, admitted the company had been overly idealistic in the past. He accepted that Russian agents had targeted Facebook users in the 2016 US presidential elections and that the social network had been used to instigate inter-communal violence in Myanmar and Sri Lanka. “If we mess something up, we better damn well make sure we don’t make that same mistake again,” he said.

But preventing “mistakes” on such vast platforms is a nightmarish challenge. Several proposals for “fixing” Facebook are flying around; none of them looks wholly convincing. Maybe Financial Times readers have some smarter ideas.

First, there are demands for governments to regulate social networks more aggressively. If Facebook is a social utility, as it has described itself, then maybe it should be regulated like one. European governments have been commendably active in strengthening consumers’ data and privacy rights by adopting the General Data Protection Regulation and punishing platforms that do not take down hate speech fast enough. But any prospect of governments exercising more control over social networks is surely a case of the cure being worse than the disease. That way China lies.

Another argument is that Facebook should be treated as a publisher rather than a platform. It should be held legally responsible for all content, just like the New York Times. But we should be wary about how far to push this argument, too. Facebook should not become the de facto arbiter of public acceptability or truth.

Some are calling for a ban on all political advertising on social media given the opportunities for manipulation. That sounds great in theory, a lot tougher in practice. It would be easy to ban official political advertising, but what precisely constitutes the unofficial kind?

Other tech critics are urging users to delete their social media accounts until the companies unplug the ad-driven “manipulation engines” that enrich them. The writer Jaron Lanier has made this case most pungently. But even he does not believe his campaign will persuade many users.

Facebook assures us it will take the lead in cleaning up the mess. Mr Zuckerberg says the company is half way through a three-year retooling exercise. Its artificial intelligence systems are becoming better at expunging extremist materials. It now employs 20,000 people to weed out offensive content.

There is no question, though, that Facebook could, and should, go further. For starters, it should co-operate more fully with political representatives and academic researchers, who are trying to address online abuse. The British parliamentary inquiry expressed dismay at Facebook’s persistent obfuscation.

In some respects, the focus on Facebook may only be blurring the far bigger societal problems of information overload and addictive distraction. Smart political operators, such as US president Donald Trump’s former electoral strategist Steve Bannon, have already understood that in this new mindworld emotion overwhelms reason and distraction usurps information. “We got elected on Drain the Swamp, Lock Her Up, Build a Wall,” he told the writer Michael Lewis earlier this year. “Anger and fear is what gets people to the polls.”

In Mr Bannon’s view, the political imperative is to dominate the conversation rather than contest a battle of ideas. “The Democrats don’t matter,” he continued. “The real opposition is the media. And the way to deal with them is to flood the zone with shit.”

Social media has provided the means to spray faecal matter around the planet at the click of a mouse. And, for the moment, our societies are without an adequate mop. “Resistance is futile,” writes Siva Vaidhyanathan in his latest book, Antisocial Media. “But resistance seems necessary.”

Donald Trump’s foreign policy is China’s gain

Short-term pain disguises the fact that Beijing benefits from the US’s global retreat

Philip Stephens

© FT montage/Getty

Donald Trump, we know, has forged a special bond with North Korea’s Kim Jong Un. We should forget Russia’s effort to subvert American democracy — Vladimir Putin is fine, just fine. Even European Commission president Jean-Claude Juncker turns out to be a good guy when it comes to talking trade. Now the US president says he is happy to meet his Iranian counterpart Hassan Rouhani. Last week he was threatening Tehran with all manner of fire and fury. Given the great deal Mr Kim got in Singapore, Mr Rouhani might do well to grab the offer.

You can see why all this might leave Beijing feeling edgy. Chinese president Xi Jinping was also once a recipient of the Trumpian best-of-friends treatment. But, as the crazy kaleidoscope that is US foreign policy keeps spinning, the White House war on Beijing’s trade policies is establishing itself as something of a constant. The president’s revised view of Mr Xi is that “he’s for them and I’m for us”.

Mr Trump has a point. Most of his generalised rage about trade is a measure of ignorance about globalisation and supply chains. He lives in the 1950s. In those days, things were made in one country — usually America — and then sold in another — preferably just about everywhere else. The modern world of bits and pieces, with components and semi-finished products moving to and fro across borders, does not fit the president’s template.

China is different. When Mr Trump accuses it of stealing intellectual property, shutting out imports and manipulating the Renminbi, he strikes a chord elsewhere. It is no coincidence that European governments — most recently Britain — are toughening controls to stop Chinese investment becoming a route to involuntary technology transfer. European businesses complain as bitterly as US ones about Chinese ownership rules. Charges of dumping are frequent. China fully exploits the rules of the World Trade Organization — and then ignores them when it suits.

So the prospect of a protracted trade conflict probably presents Chinese leaders with real cause for concern — the more so since the economy is slowing and there are visible cracks in the financial system. Even the most authoritarian regimes fret about their grip on power.

Communist Party rule has by and large won acceptance because of accompanying rises in living standards. Mr Xi does not want to test the proposition that his writ would still run unchallenged during an economic slump.

Mr Xi’s China is also unaccustomed to such pressure. For a decade and more it has had more or less a free run on both economics and geopolitics. Whether it was because they were anxious to grab a share of the Chinese market or concerned to lure Beijing into the multilateral system, western governments have been loath to offend. The softly-softly approach is shifting. And Mr Trump’s trade war makes it easier.

And yet. Tempting though it is to say that China is fast emerging as the big loser from Mr Trump’s foreign policy, the reality is more likely to be the opposite. For all that the US president has discomfited Mr Xi, the noise obscures the longer-term impact of American policy.

Any short term pain should be set against the immense strategic gain for China flowing from Mr Trump’s worldview. In the inevitable global contest between these two great powers, the US is already surrendering advantage to its rival. Chinese policymakers have long had a plan for global primacy. You could be forgiven for thinking that the White House has decided to lend them a hand.

The US starts out with the huge advantage not just of its military and technological superiority but an unparalleled international alliance system. Economic, defence and security agreements with allies across Asia and the Middle East and military bases in dozens of nations have become part of the architecture of American power. Beijing has only a handful of willing accomplices — think, say, Cambodia — alongside the deference it can buy with foreign investment. You do not find other nations saying they want to copy China.

So how is the US playing this advantage? For all the present let’s-be-nice mood in the White House, Mr Trump is progressively dismantling the pillars of the US-led international order.

One way or another the president has undermined the US commitments to climate change, nuclear non-proliferation, Nato, the EU and longstanding treaty relationships with Japan and South Korea. No one can be sure that tomorrow he will not tear up the North American Free Trade Agreement or pull US troops out of the Middle East. The credibility and trust on which US power was built is draining away. If the US does not respect an American-designed order why should anyone else?

China’s long-term strategic goals are clear enough. It wants to restore its control over its own neighbourhood — hence all those new military outposts in the South China Sea, and it wants to collapse the distance between Asia and Europe with its Belt and Road Initiative. It is often said that Beijing wants to see the 21st century become the Pacific century, much as the 20th was the era of Atlanticism. The Pacific, though, is mostly water. China wants to be the leading Eurasian power. In any event, its ambitions have always rested on the assumption that it would need to roll back US influence over time. Mr Trump has set about this task with gusto. That, surely, is worth some short-term pain.

 Global Housing Bubble Is Popping. Here Comes The “Reverse Wealth Effect”  

Just a few months ago, real estate was on fire. Prices were blowing past records set during the previous decade’s housing bubble as desperate buyers bought whatever was available at above the asking price while homeowners, confident that prices would keep rising, held out for the next big pop to sell. Notice on the following chart how the ascent steepens at the beginning of this year.

home prices wealth effect

Then, as if someone flipped a switch, the trend shifted into reverse. Not just in the US but nearly everywhere. This list of recent headlines tells the tale:

Housing demand sees biggest drop in more than 2 years

Hamptons property sales slow as caution spreads to the wealthy

Home Prices Are Falling in One of America’s Richest Suburbs

First Time Ever, More Chinese sellers than buyers

Vancouver Suffers Its Worst July for Home Sales Since 2000

Record Drop in Foreigners Buying U.S. Homes

Australian home prices take biggest dip since 2011

The End of the Global Housing Boom

Manhattan Real Estate: Prices Plummet, Sales Tank

What’s happening and why is it happening now?

Several things came together pretty much simultaneously to turn houses from must-have-at-any-price necessities into completely optional and maybe not even desirable: First, prices rose beyond the reach of all but the seriously affluent. The gap between the price of the average home and the size of the mortgage the average local buyer can afford has been rising for years, but recently in the hottest markets it has become a chasm. Meanwhile, mortgage rates have started to rise, increasing the monthly payment on a given house dramatically.

mortgage rates wealth effect

If you live in San Francisco or Sydney or Vancouver, chances are you can’t afford to buy a decent house – not even close. And if you can’t you don’t.

Second, the eruption of trade wars between the US, China and Europe has made foreign houses less straightforward for Chinese and Russian millionaires. As a result, fewer of them are making all-cash, price-is-no-object offers on overseas trophy properties.

The reverse wealth effect should terrify holders of stocks and bonds

 For the past several decades it’s been the explicit policy of governments and central banks to use low interest rates and more recently direct purchases of stocks and bonds to push up the price of financial assets. The goal was to make holders of those assets feel rich and smart and therefore more inclined to borrow and spend on frivolous stuff that would boost GDP. This is called the wealth effect and it’s been firing on all cylinders in the age of QE and ZIRP. But all that borrowing – by individuals to buy houses (and SUVs and 70-inch flat-screens), corporations to buy back their stock – and buy out each other – at record high prices, and governments to build unnecessary roads and bridges and invade each other – has left a lot of debt lying around that has to be paid off with future cash flow.

Let a huge sector like housing turn down and the wealth effect will shift into reverse, as every homeowner in the world watches their biggest asset shed the leveraged profits that had made them feel rich and smart. Now they feel poor and dumb, and suddenly risk-sensitive. So they pull up their stock portfolios and find a bunch of price charts with a disturbing resemblance to that of their house.

Armed with the sudden revelation that trends can reverse, they decide to lock in some of their Apple and Google profits. Millions of others make the same decision, and high-flying tech stocks start behaving like wounded ducks.

And just like that the markets’ emotional tone shifts from carefree buy-the-dip to terrified sell-the-rip.

Capital gains tax revenues dry up, government deficits soar, and the river of cash flow that was earmarked for servicing a mountain of debt slows to a trickle. And it’s hello, 2008.

How the U.S. Saved the World From Financial Ruin

By  Matthew C. Klein

     The U.S. Federal Reserve Illustration: LUDOVIC/REA/Redux 

The Federal Reserve’s response to the financial crisis involved lending tens of trillions of dollars to borrowers based outside the U.S. This was not charity but an act of enlightened self-interest.

As Nathan Sheets, then the head of the Fed’s international finance division, explained in his presentation to the Fed’s policy-making committee on Oct. 28, 2008, “The structural interconnectedness of the global economy” meant that trouble abroad would create “unwelcome spillovers” for the U.S. Floridian mortgage borrowers and Midwestern manufacturers were entangled with Japanese farm cooperatives, Irish property developers, and German regional banks.

The Fed’s decision to deploy its power abroad is one of the pivotal moments in Crashed: How a Decade of Financial Crises Changed the World (Penguin), Columbia University historian Adam Tooze’s brilliant new account of the tumult of the past decade. I had a chance to talk with Tooze about the book in a recorded conversation.

As Tooze describes, both the size and the distribution of the lending was a demonstration of America’s indispensability to the global financial system. Borrowers all over the world needed help that only the Fed could provide. At the worst of the crisis, the Fed had nearly $1.7 trillion in emergency loans outstanding. Of that, roughly $600 billion was extended directly to foreign central banks.

The Fed also had about $450 billion in loans outstanding via the Term Auction Facility and more than $300 billion provided by the Commercial Paper Funding Facility. Foreigners received the majority of the funding from both of those facilities and were also avid users of the comparatively small primary credit facility.

The Fed lent abroad in such magnitudes because its officials appreciated America’s dependence on Europe’s banks. Collectively, those banks were too big and too important for U.S. financial intermediation to be allowed to fail. In the years before the crisis, European banks borrowed from American money-market funds and provided credit to Americans by buying asset-backed securities.

By the end of 2007, foreign banks had accumulated more than $6.5 trillion in claims on U.S. borrowers, of which $4 trillion could be attributed to banks in France, Germany, Switzerland, and the United Kingdom. Banks in other European countries, particularly Belgium, the Netherlands, and Spain, accounted for another $1 trillion. For perspective, U.S.-chartered commercial banks had extended only $7.5 trillion of credit on the eve of the crisis.

Tooze quotes a European official joking that Frankfurt, home of the European Central Bank, had effectively become another branch of the Federal Reserve system during the crisis. A global financial system based on the U.S. dollar demanded a global response led by the American government. While the Fed tried to downplay the significance of its interventions, the reality is that it had engaged in an act of international economic statecraft comparable to the Marshall Plan.

The Fed’s willingness to think expansively and act decisively was in contrast to Europe’s own policy makers, who, as Ben Bernanke, then the Fed’s chairman, tactfully put it, “have had some difficulty coming to the realization that Europe would be under a great deal of stress and was not going to be decoupled from the United States.”

In early October 2008, the Dutch had suggested pooling the collective resources of the European Union’s economies to bail out their banks and guarantee deposits. The French, British, and even the boss of Deutsche Bank all supported the idea of a joint effort. This made sense, since most European banks had significant operations in neighboring countries. Regardless of whether their headquarters were in Paris or Amsterdam or Frankfurt, their exposures were pan-European. National borders should have been irrelevant for deciding who would bear the burden of saving a tightly integrated financial system.

Then the German government and the ECB made one of the greatest policy mistakes since the 1930s. They insisted on national solutions led by national governments. French President Nicolas Sarkozy claimed German Chancellor Angela Merkel had told him, “Chacun sa merde”—she would not clean up others’ messes. This decision led directly to the European sovereign crises and to a lost decade for hundreds of millions of people.

Perhaps even more egregious was the ECB’s refusal to help people outside the euro area who needed euros. The Fed understood what would have happened to Mexico and to Korea if they were deprived of dollars, so they created swap lines and lent in size. Yet Trichet and his colleagues declined to make similar arrangements with Poland, Hungary, and the Baltics. The post-Communist states eager for equality with the West were instead fobbed off on the International Monetary Fund. Fed officials were shocked. Tooze convincingly argues that this was the beginning of the increasingly poisonous division between Europe’s West and East.

Tooze’s history never loses sight of the political implications of these financial developments.

The crisis was caused by transnational banks. The rich world’s governments focused on returning those banks to profitability, but devoted far less attention to the people who lost their jobs, homes, and pensions. We are living with the consequences.

3,453 days and $18tn later, the US bull market hits record run

From battered banks to tech titans, the historic milestone in seven charts

Nicole Bullock and Brooke Fox

© Bloomberg

The US bull market is now officially the longest ever. From the depths of the financial crisis, revived by central bank stimulus, fuelled by technological innovation and finally given a shot of tax cuts, the S&P 500 has gone 3,453 days without a drop of 20 per cent, the decline typically associated with a bear market. That edges it past the 1990-2000 bull run that culminated in the dotcom boom.

Like the bull market it surpasses, the rally from March 9, 2009, has also coincided with a technological revolution; in this case the rise of the digital economy and reflected in the reshuffled leadership of the S&P 500.

In March 2009, the largest companies in the index by market capitalisation were ExxonMobil, Walmart and Microsoft, respectively. Now topping the leaderboard are Apple, Amazon and Alphabet. Facebook, in the No 6 spot, was not even a public company when this bull run first got under way. Microsoft may have weathered the transition to the cloud to retain a top slot; IBM has not been so successful.

The stock market stars of the digital economy were even given a nickname as the bull market got longer in the tooth: the Faangs. If you had dropped 99 per cent of the S&P 500 and focused on the behemoths that seem to have taken over consumers’ everyday lives — Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet — you would have outperformed the bull market handsomely. Concerns about privacy, heightened regulation and growth prospects of these tech companies are not just important questions for the durability of their share price gains. They are now central to the prospects for the overall bull market.

But 3,453 days ago, all eyes were on the banks. Brought low by excessive risk taking and then the bankruptcy of Lehman Brothers, they had only just been recapitalised with injections of taxpayer bailout cash and their futures were in doubt. Investors who picked through the rubble wisely beat the S&P 500 on some of the biggest banks.

The market value of the S&P 500 is up 312 per cent from March 9, 2009, a thumping $18.4tn.

But measured another way, the market is shrinking. The number of shares in the S&P 500 has fallen 3.1 per cent — a factor that some say creates a scarcity value that has added to the gains.

After a burst of equity issuance in the wake of the financial crisis, particularly by banks rebuilding balance sheets, the number of shares has been declining sharply. The reason? A surge in companies buying back their own stock. 
US equities

That spree has underpinned stock prices and propped up all-important earnings per share numbers. Economic growth and the big tax cuts enacted at the end of last year are the biggest factors, but buybacks have also helped the S&P 500 companies report back-to-back quarters of nearly 25 per cent earnings per share growth this year. The buyback trend has been accelerated by the repatriation to the US of profits once held overseas to avoid taxes; Goldman Sachs believes US companies will repurchase a record $1tn of their own shares this year.

Have a glass of champagne to celebrate the record length of the bull run, for sure, but consider that it has significant ground to go before becoming the most lucrative.

The index closed on Wednesday up 323 per cent from the start of the bull market, shy of the 417 per cent gain for the 1990-2000 run. The latest rally has actually been quite sluggish, at an annualised pace of 16.5 per cent compared with the 22 per cent average for bull runs in the US.

The fastest? The 35.5 per cent annualised pace of the 1932-1937 bull market that followed the 1929 stock market crash.