• 28 Jan 2008 at 3:47 PM
  • Ben Stein

Ben Stein’s Intensely Silly Market Manipulation Theory

Ben Stein was up to his usual silliness in Sunday’s New York Times, this week writing about a conspiracy theory involving traders manipulating the market in search of profit. He gives his theory a name—Financial Realism—because he bases it on something he learned about in law school called Legal Realism. According to his theory, traders have been using fear churned up by the subprime storm to push markets down in search of profits.
It’s a really radically theory of how easily markets can be manipulated. If traders could really move markets like Stein thinks, we wouldn’t already be hearing about January was a terrible month for hedge funds, and quantitative managers went through another 28 sigma event last week. And, as Gary Weiss points out, if Stein were right about this all being a result of manipulation, that would be good news. Because soon the efficiency of the markets would step in, set things right, the Fed wouldn’t have to inflate away are already meager savings and we could live forever on the big rock candy mountain.
“If the current market action is the manifestation of some sort of evil trader genius, they have executed it pretty poorly,” Naked Capitalism writes. “Every major firm should have been net short, not just Goldman. The investment banks, with their sales forces and research arms, are in a much more powerful position to push rumors. If the market fall was by design, pray tell me how it benefited the Street? They have taken over $100 billion in writeoffs, and the fourth quarter results are still coming in.”
After the jump, we get into it with a bit more detail with Stein again.


So where does Stein get his ideas? Maybe he’s just too old, suggest Larry Ribstein. Back when Ben was learning the secret truth about legal realism as a law and economics student at Yale, people believed some really dumb things about markets. (And even dumber things about law.) “Ben’s pre-1970 education in law and economics has, shall we say, some gaps. Among other things, he has missed 35 years of theory and data about the efficient capital markets hypothesis, which was just getting going around when Ben graduated from law school,” Ribstein writes.
But Stein’s theory is flawed from its genesis, which is his surprise that the stock markets have suffered a decline over the past several months. “The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts –very roughly—a fall in corporate profits of roughly 14 percent,” Stein claims. “Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.”
Felix Salmon points out that its surprising to see a proponent of manipulated market conspiracy theory who displays such a strong faith in the efficient markets hypothesis. “The implication seems to be that the efficient markets hypothesis held in October, and that the market was pricing in future profits correctly; and that it doesn’t hold today, in the wake of all that short-selling by those nasty traders,” Salmon writes.
Even the way Stein claims to have come by his theory strikes us as doubtful. Stein lays out his theory with a story he heard from a guy who is now dead. Hint: that’s what you say when you don’t want anyone checking your facts.

Because I usually write about finance, I have come to believe in the theory of what I would call “financial realism,” or what might more accurately be called “trader realism.” Under this theory, on which I have an imaginary patent, traders can see masses of data any minute of any day. They can find data to support hitting the “buy” button or the “sell” button. They don’t act on the basis of what seems to them the real economic situation, but on what’s in it for them.
Just as a tiny example, years ago a close friend, now deceased, was a trader in London for a big financial house. As he told it, one day I.B.M. came out with stellar numbers. The boss of the trading floor said, “O.K., the guy who’s getting the prize is the one who can make us money selling I.B.M. short.”
So the traders grabbed for their phones and started to put out any bad thoughts they could dream up about I.B.M. They called journalists, retailers, anyone. They sold huge amounts of I.B.M. short. Soon, they had I.B.M. on the run, made money on their shorts and went to Langan’s to drink champers.

Basically, we call bullshit on this uncheckable story Stein uses to illustrate an unsupportable theory.
Can Their Wish Be the Market’s Command? [New York Times]
Ben Stein on the Meshuganeh Market [Gary Weiss]
Ben Stein Tells Us It’s All the Traders’ Fault [Naked Capitalism]
Ben Stein on law, legal realism, economics and finance [Ideoblog]
Ben Stein Watch: January 27, 2008 [Portfolio]

Comments (24)

  1. Posted by Charlie | January 28, 2008 at 4:07 PM

    Shuuuuuuuuuuuuuuuuuuuuun the nonbelievers!
    We’re going to Candy Mountain, Ben!

  2. Posted by Gin&Tonic | January 28, 2008 at 4:18 PM

    Blue Horseshoe loves Anacot Steel

  3. Posted by R. Paul | January 28, 2008 at 4:21 PM

    I assume that we have not heard from Bess today because she is out campaigning for Ron Paul.

  4. Posted by 1-2 | January 28, 2008 at 4:25 PM

    Charlie…Charlie…Come to Candy Mountain! Great reference.
    Snap back to reality though, and you can see just how rediculous Stein’s tale is. I can go into a number of reasons why, but, for simplicity and time, I will only point out the most obvious yet overlooked. Every purchase or sale of a security is called a “trade” for a reason: there is a counterparty. Every time a trader hits the bid there is someone whose offer is lifted, ie someone betting the opposite direction. “But sure, they are retail investors getting screwed by the big IBKs”, you say, but that holds water about as well as the SIVs we have grown to know and love. The simple reason that can’t be true is because the market is ruled by institutional investors who trade orders of magnitude more shares than the retail investors could simply absorb.
    The other problem is the simple coordination problem–someone is going to defect from the strategy.
    Sure, traders can push the market around a bit here and there, but only for short periods. Months and quarters require huge participation; perhaps, as south park said, it’s “the greatest conspiracy ever…ever.”

  5. Posted by Erin Burnett's Booty Call | January 28, 2008 at 4:35 PM

    “The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts –very roughly—a fall in corporate profits of roughly 14 percent,”
    Apparently Stein doesn’t understand the principle of multiple compression.
    But he played a teacher in a movie, so he has to be smart!!!

  6. Posted by 1-2 | January 28, 2008 at 4:41 PM

    @booty call – Agreed, but i wanted to add a ripple. When the market crashed in 00-02 it called for (according to Stein’s math) a fall of 50% in the earnings of NDQ listed companies. While the entire economy may have never suffered a 14pct decline in profits, that does not mean future profits were appropriately forecast.

  7. Posted by TheUnrepentantGunner | January 28, 2008 at 4:43 PM

    From a top 100 movie:
    Anyone? Something-d-o-o economics. “Voodoo” economics. ”
    i really think that it should be dog-doo.

  8. Posted by Anal_yst | January 28, 2008 at 4:44 PM

    So the French Finance Minister claims this SocGen schmuck broke through 5 firewalls in order to pull off all these bogus trades?
    Hmmm, smells like froggy bullsh!t to me…
    …the question though, is whether the real honest truth in this matter will ever come out, as its going somehow methinks not.

  9. Posted by 1-2 | January 28, 2008 at 4:50 PM

    Anal_yst, i am watching this too. Apparently the dude actually used to work in the tech/back office before trading so he had “intimate knowledge” of the system or some bs like that (courtesy of the wsj today). I don’t buy it, but whatever.
    What is more rediculous is Maria’s question: “what can be done to ensure this never happens again”? When will people learn, that while blankies are nice to sleep with (not that i do, just saying) they don’t actually provide any safety. Everyone needs to put their freaking blankets away and remember what risk is, feels like, and costs. Only then will we get rational markets again.
    The business cycle is not dead.
    Risk is real.
    Recessions will happen.
    And the B man (take your pick) dropping $250 down everyone’s chimney isn’t going to fix anything, and will only encourage future stupid behavior.

  10. Posted by 1-2 | January 28, 2008 at 4:59 PM

    MCC IS DOING FACEBOOK PICS OF THE TRADER!! WTF KIND OF NEGAVERSE HAVE I ENTERED!!

  11. Posted by E. Vye | January 28, 2008 at 4:59 PM

    this is hilarious.
    first of all, are there still times readers who jerk off to the idea of the “market” as some intricate network of secretaries and shoe shiners who could take down IBM with one call to that “trader” in a green visor, who sits in a shitty office at one penn plaza shouting into a tan telephone all day? People are that stupid? It’s like those old commercials where the guy who got up at five in the morning to read the Journal was richer than his buddy who didn’t…because the Journal is full of seeeecrets.
    Second of all, why is anyone listening to the asshole who hosted america’s most smartest model? Did anyone see him? He kept losing his shit and getting a boner attack over the one who was the stupidest – that busted hideous chick with the enormous fake everythings. It was the sad, horny and rejected 14 year old Ben coming out for everyone to see. Really depressing.

  12. Posted by Commodities Desk | January 28, 2008 at 5:01 PM

    1-2: well said, but I think I’m getting $600 to do my patriotic duty of putting the cash paddles to the economy’s limp heart.
    how did it go with “girl?” is she? I hope so, she’s sassy like our Bess. Or he is and that’s just wrong.

  13. Posted by Anal_yst | January 28, 2008 at 5:07 PM

    @ 1-2
    Totally agreed. The ridiculously stupid sh!t happening, and worse, being discussed vis a vis the global economy is obscene, and sh!ts on all accumulated knowledge of human behavior since the beginning of time.
    I’m not quite sure why a lame-duck president is so concerned with acting immediately (and stupidly/short sightedly – if thats a word), although the pussy dems are probably worse (can’t believe I just said that btw).
    I wish the administration and the legislative branch could pull their collective heads out of their ass to realize this is a perfect opportunity for them to focus on building/improving infrastructure in this country, energy, transportation (how about developing a world-class rail system?), etc. That sort of stimulus package would take far longer for funds to ‘trickle down’, but would, quite clearly, be far better for everyone’s long-term interest, even for the politicians seeking to establish their legacy/keep their jobs.

  14. Posted by BSD | January 28, 2008 at 5:22 PM

    Anal_yst,
    What you said right now was extremely rational – that’s why it will never enter the legislature’s minds.

  15. Posted by Ben_Stein_Is_Stupid | January 28, 2008 at 5:38 PM

    So his theory is that when the market goes down it is because of the evil traders and speculators but when it goes up all the traders and speculators have the day off? I wish I was a trader and got to take over half the year off last year.

  16. Posted by Anal_yst | January 28, 2008 at 5:39 PM

    @ BSD
    Touche.
    How dare I let my youthful optimism get the best of me like that?!

  17. Posted by John Carney | January 28, 2008 at 6:09 PM

    Since I was out of commission for the later part of last week, I’m still playing catch up Soc Gen. I’ve been trying to figure out what’s going on and not really writing about it at all until we get a handle on it. Smells fishier and fishier to me too.
    Emails are appreciated if you have any particularly good insight. Thanks.

  18. Posted by Street Cred | January 28, 2008 at 11:09 PM

    If you are eligible for that tax credit – you should stop reading dealbreaker and get back to work…cause you’re poor.

  19. Posted by Disinterested Observer | January 28, 2008 at 11:48 PM

    Thank you for that moment of wit, Street Cred. I was going to point out the same thing to Commodities Desk, but you beat me to the punch. Under the House plan, the tax credit goes away if you make more than $75k per year (more if you file as a married couple). Nothing’s passed the Senate yet, so as of today, no one’s eligible for anything.

  20. Posted by Anonymous | January 28, 2008 at 11:53 PM

    Fuckers. I still want my tax credit….maybe if I get laid off in the next few weeks…

  21. Posted by Anonymous | January 29, 2008 at 7:40 AM

    His career will accelerate south quickly with this nonsense.
    Bueller? Bueller? is how I will remember him.
    Financial realism indeed.

  22. Posted by Bgascan | January 30, 2008 at 7:32 PM

    “to inflate away are already meager savings”?
    Presumably, that should be “our.” Proofreading is another skill that seems to be lacking in the internet age…

  23. Posted by Gin&Tonic | January 28, 2008 at 4:18 PM

    Blue Horseshoe loves Anacot Steel

  24. Posted by fx | October 1, 2012 at 9:12 AM

    Today, with all the fast life style that everyone leads, credit cards have a huge demand in the economy. Persons out of every field are using credit card and people who are not using the credit card have made arrangements to apply for just one. Thanks for sharing your ideas about credit cards.