Ben Stein's Latest Conspiracy Theory
Sigh. I used to think Ben was OK. But no longer.
This is the same knucklehead who said the current banking problem wasn't big enough to have much effect on the economy. He's the one who was telling people to buy banks stocks. Today, he's issuing a "my bad," but has it completely wrong.
The problem, he says, was credit default swaps, and the amount of money "speculators" stood to make if these went bad.
The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.
The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)
In blaming "speculators" who bet against those mortgages -- as he has done in the past -- he is simply blaming flies for the cowflops. He ignores the real problem, which is that this kind of "insurance" against derivative failure was issued by all sorts of entities that did not have the capital cushion to make good on the losses if/when they came. That set the stage for cascading defaults, and with the "insurance" on so many credit instruments being worthless, the value of the underlying, over-leveraged junk bonds becomes worthless too.
The problem with this wasn't the money people stood to make if things went bad, it's the money people thought they could continue to make by betting that all those lousy mortgages would end up good. The derivative swaps were supposed to have taken away the risks on this stuff, but instead they only camouflaged it, and made it possible for speculators (Bear, Lehman, Fannie, Freddie, Countrywide, et al.) to pretend that their packaged mortgage bonds were all fine.
And the inability of the derivative market to actually insure these mortgage-backed securities against default is precisely why Paulson, Bernanke, and Bush are trying to bum-rush all of us into buying this toxic junk now.
The problem was speculation, all right. But Stein's blame-o-meter is 180 degrees off. It was years of real estate speculation that led to the collapse, not the small group of folks who bet against its sustainability.