How the hysteria over Toyota's tribulations spiralled out of control

US OUTLOOK

Call it "The $5bn Injustice". For the best part of two years,Toyota has been fighting a tide of innuendo about the safety of itscars. It has had to contend with crackpots and fraudsters on theevening news, the political theatrics of Congressional hearings andselective quotations from subpoenaed documents, plus an internet mobin full cry.

And this week, the best scientists in the world confirmed whatthe Japanese car maker has been saying over and over: there isnothing wrong with the electronics of its vehicles. Those terrifyingcases of "unintended acceleration", where cars were said to haveraced out of control, for the most part had a very prosaic cause:drivers were holding down the accelerator.

The story of how a few genuine cases, caused mainly by ill-fitting floor mats that slipped over the accelerator pedal, whichwere fixed by Toyota in a series of recalls beginning in 2008,turned into a circus of ever-more exaggerated claims should terrifyevery executive of a major company. The unreasonableness andextremism that we often decry in US political debate is just asprevalent when it comes to business.

The reasons are hardly a secret. There are more rolling-newsminutes than there are experts to fill them. The imperative to "movethe story on" entails speculating about worst-case scenarios. Two-bit science is elevated and indistinguishable from more informeddiscussion. There is no mileage for a blogger in accepting thescientific consensus. No clicks on a headline that says, "Don'tpanic". Website comment sections fill up with cynicism and anti-corporate invective.

It is part of a wider, more philosophical problem. We areconditioned to believe that cleverness lies in seeing through thestatements of a corporation or a government, to a truth they aretrying to obscure; our whole mode of thought means we don't listento what anyone says any more, we go straight on to asking why theymight be saying it. To simply accept something at face value? Howdumb!

The impact on Toyota's market share has been profound. Its salesin the US fell 0.4 per cent last year, while the industry as a wholerose 11 per cent. Earlier this month, a consulting firm calledInterbrand calculated that the value of the Toyota brand had slumped16 per cent, almost $5bn, in the past year.

The US government of course did find flaws with Toyota'sprocedures for the timely reporting of safety issues to regulatorsbut, absent the level of hysteria, it is unlikely these would haveled to the $48.8m in fines that Toyota eventually agreed to pay.

I have been struck by the parallels with the reaction to the BPoil spill last year. Without in any way dismissing the massiveeconomic and environmental cost of the spill, the amount of two-bitscience being peddled during the outcry was very depressing.Remember those two chaps demonstrating how you could soak up oil intheir kitchen saucepans, using just a bale of hay? Remember the huntfor those imagined plumes of oil, before it turned out the spill wasdispersing naturally? In the end, one of the most profoundscientific statements during that crisis was Tony Hayward's, when hesaid: "The Gulf of Mexico is a very big ocean."

Even this week, the report of Nasa scientists wasn't good enoughfor some of Toyota's critics. Steve Berman, attorney for some of thepurported victims of "unintended acceleration" and presumably nothimself a rocket scientist, immediately began critiquing themethodology of the study and signalled his legal fight will go on.

In the cacophony of modern communication, from mainstream mediato the raised voices of everyone on the internet, we must strain tohear the real experts - but it is getting harder. For executives,this is a terrifying new reality. The modern crowd, like markets,can stay irrational longer than you can stay solvent.

Government faces up to mortgage reform

The Obama administration is finally getting down to the greatunfinished business of the credit crisis, namely the question of howto recast US government help for the mortgage market.

The two mortgage finance giants, Fannie Mae and Freddie Mac, havesucked up about $134bn of taxpayer funds since collapsing in 2008and having to be nationalised. These companies were always apeculiarity in the supposed land of free markets, quasi-publicinstitutions able to borrow at close to US Treasury rates, pushingdown mortgage rates for most Americans.

The administration has been deliberately missing deadlines tocome up with reform plans. Since coming into formal governmentownership, Fannie and Freddie have become even more important propsto the fragile US housing market. Now they buy or guarantee 90 percent of all new home loans. The discussion document released by theUS Treasury yesterday was refreshingly honest about why changesshould only be phased in over a very long period. Any responsiblereform will make credit less easily available than before thecrisis, it says.

None the less, the principles set out in the document set the USon a course to phase out Fannie and Freddie and the across-the-board government subsidy for mortgage borrowers that they imply,without removing government from the mortgage market entirely.

The debate is over whether and to what extent the governmentshould provide support for low-income or otherwise disadvantagedgroups that want to get on the property ladder, and how thegovernment should work to ensure the smooth functioning of theprivate mortgage market.

One of its proposals looks like a particularly good start point.It suggests a government insurance scheme for basic mortgages whichwould be rolled out during credit market contractions, and could bedramatically scaled up if there is a repeat of the credit crisis.

The US mortgage market needs government help today to protectagainst a downward spiral of housing market declines and economicwoe. It will need it again in the future. It doesn't need it inbetween.