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.
You have to admire the mental agility of Ben Stein. A couple of weeks ago he was calling for the Justice Department to investigate Wall Street. Now he wants the government to bail them out with billions of taxpayer dollars.
Oh, and it’s not morning in America anymore. Now he says the economy is slowing.
Larry, Curly, Moe and the Economy [New York Times]
We thought that our wrap-up of the reaction to Ben Stein’s piece might finally put our day-long obsession with his Goldman Conspiracy Theory Essay to rest. But then Stein himself decided to lash out against one of his opponents.
The news comes from our friends at New York magazine’s Daily Intel, who actually got a hold of Stein and asked him about the reaction.
“It is hardly to be expected that I could question an institution as powerful as Goldman Sachs and not get some response,” Stein told Daily Intel. “As to Paul Krugman, I don’t like to deal with people so full of hate. His recent piece on [Milton] Friedman [in the New York Review of Books] was so thoroughly debunked by Anna Schwartz that I would well imagine he’s not happy.”
Of course, this is a slimy—if tactically smart—move. No doubt Stein is particularly hurt that another New York Times writer with economic credentials bashed his essay. (Isn’t there some policy that says they aren’t supposed to openly mock each other? We’d always assumed that there must be. How else do you explain the lack of open mockery of Maureen Dowd in the pages of the Times?) But going after Krugman is slimy-smart because a lot of Stein’s detractors are also not the biggest fans of the Krug. It even makes us uncomfortable to find ourselves agreeing with him. And reminding everyone that Krugman is a Friedman-basher and, more broadly speaking, an Keynesian enemy of free-markets is rhetorical hardball.
But it’s probably a misstep for Stein to imply that his column was criticized because he questioned “an institution as powerful as Goldman Sachs.” Take a look at that long list of critics from our earlier post. Not a one of them is routinely a defender of Goldman or of institutional power in general. In fact, pretty much every single one of the critics we quotes is far better known for biting at the ankles of our financial titans. This just makes Stein looks sadly defensive.
Ben Stein Thinks Paul Krugman Probably Just Has Low Self-Esteem [Daily Intel]
We’re not the only ones who have called out Ben Stein for yesterday’s column. It’s getting roundly trounced by most commentators. Here’s a quick round-up of some of the comments we’ve come across today.
• Roger Ehrenberg thinks the main sin of Goldman economist Jan Hatzius did was dissenting from Stein’s rosy view of our economic prospects. “Just because his paper doesn’t comport with Mr. Stein’s view of the world doesn’t make it wrong or its methodology flawed – it’s just that Mr. Stein doesn’t like it,” Ehrenberg writes.
• Athenian Abroad says that Stein doesn’t seem to understand the difference between capital requirements and reserve requirements. “Hatzius’s paper describes the impact of the sub-prime crisis on bank lending via the hit to banks’ capital. Stein dismisses this, because the Fed can create reserves, and because Stein doesn’t know that these are completely different things,” the Athenian writes.
• Naked Capitalism goes back an re-reads that Alan Sloan piece Stein refers to and discovers that the New York Times columnist totally misread it and seems to have confused events of 2006 with those of 2007.
• Stein’s even getting it from his fellow denizens of the New York Times. “Maybe I don’t have what it takes to be a serious columnist. I mean, it would never have occurred to me to suggest that the only way to explain an economic forecast I don’t agree with is to say that it must be part of an evil plot to drive down the market, so that Goldman Sachs can make money off its short position — and to suggest that Goldman should be the subject of a federal investigation,” Paul Krugman says.
• Leftist economist Dean Baker won’t even support the Goldman bashing. “Stein gives no reason whatsoever to doubt that Hatzius wrote a serious analysis of the current state of the U.S. economy,” he writes.
• Dan Altman turns Stein’s conspiracy theory around. “You could also ask whether Stein, a friend of the Bush family and sometime cohort of the president, is just trying to prop up the economy to help his old pal,” he writes.
• Surveying the scene—the Stein piece, the reaction to it (we cribbed a couple of these links from his earlier post)—Portfolio’s Market Mover Felix Salmon finds himself depressed. “It’s not illegal – in this country – for Stein to make such allegations. But it is quite shocking, and depressing, that the Gray Lady would willingly allow herself to be used as a vehicle for this kind of yellow journalism – and would place it on the front page of its business section, no less,” he writes.
• Even Fake Ben Bernanke takes a shot: “Stein goes on to say in reference to Goldman ‘It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets.’ Of course, Stein innocently points out that he’s simultaneously a shareholder in the company he’s criticizing. Why not have it both ways?”
• Oh, and because of the wonders of the internet, we have already heard from Henry Blodget, whose crooked stock analysis was cited by Stein in the column. “The real lesson here is that Wall Street analysts can’t win: No matter what they say, it is easy to suggest that their conclusions might be motivated by something other than the facts. This is fair (who knows what truths lurk in the hearts of men?), but let’s at least note that Wall Street shares this conflicted condition with many other industries,” Blodget writes.
So far, Stein’s only defenders seems to be our pals Charlie Gasparino, who has been appearing on CNBC to balance what has been a brutally critical reaction by most of the networks anchors and guests, and Wall Strip founder Howard Lindzon. Over on his blog, Lindzon writes that “Goldman is the world’s largest bookie that fixes games and legally sells you shit while they are dumping it out the back door.”
While we’re on the topic, we might as well mention that Ben Stein also seems to have an inflated view of the role of economists at investment banks, and perhaps in the world. Most traders and brokers we know tend to regard their economists as irrelevant at best and hazardous at worst. They are used to economists taking positions that are unhelpful to their book or to their sales efforts. But they don’t mind that much because they don’t think many people listen to—much less follow the advice of—their economists.
“These guys are talking heads for us. Part of brand promotion on a grand scale. They might as well work for the PR department. They get the firm’s name out there but, internally, no one really trades on what they say,” one equity trader with over twelve years experience tell us.
We’re kind of having a Ben Stein afternoon here at DealBreaker. We can’t seem to put his Sunday column down.
Earlier today we noted how his Sunday column rested on the nonsensical position that there was something unethical about shorting mortgage indexes while selling collateralized mortgage products. But the thing that seems to be getting the most attention around town is Stein’s sleazy smear against one of Goldman Sachs’ leading economic analysts, Jan Hatzius. We want to talk about this but we can’t even get straight what it is Stein is accusing Hatzuis of doing. (And we suspect Stein can’t get it straight either.)
On the one hand, Stein points out that Goldman Sachs apparently sold collateralized mortgage products but—don’t try to follow this too closely or you’ll wind up stupider for having tried to think like Stein—one of it’s chief economists has said that the credit crunch may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a recession.
“Doesn’t this bear some slight resemblance to Merrill selling tech stocks during the bubble while its analyst Henry Blodget was reportedly telling his friends what garbage they were?” Stein asks.
On the other hand, Ben Stein makes the opposite point: that Goldman’s chief economist is attempting to talk up a recession to help Goldman’s short positions.
“Here is my humble hypothesis, even after talking to Goldman: Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally?” Stein asks. “His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see.”
Goldman can’t win with Stein. If the sell credit products while shorting them he accuses them of being new-age stock pumpers. If they publish reports predicting dire consequences for the economy, he accuses them of creating fear to bolster their short positions.
Our humble hypothesis is that Stein has no idea what he’s saying. He can’t decide whether Goldman’s sin was selling products it doesn’t believe in or promoting a view of the credit markets it does believe in. His main column is a mess of innuendo and half thought out positions, mixed is misplaced populist bravado. It’s like he packed every nasty thing he could think of—without bother to actually think thought any of them—and then let them pour onto the pages of the New York Times, like so many clowns falling out of a tiny car.
Earlier on DealBreaker: Ben Stein’s Crazed Attack On Goldman and Ben Stein’s One Good Point.