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Ben Stein's Latest Conspiracy Theory

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September 23, 2008 – Comments (6)

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.

Sj

 

6 Comments – Post Your Own

#1) On September 23, 2008 at 11:41 AM, kdakota630 (29.82) wrote:

I tend to like Ben Stein, but don't think he has any business (no pun intended) giving business advice.

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#2) On September 23, 2008 at 12:05 PM, suntzu777 (< 20) wrote:

I lost all respect for Ben Stien about 3 years ago when on Cavoto, he said all the members of the senate were grossly underpaid. I would love to make a healthy 6 figure salary with a 15 percent anual pay raise. If that is grossly being underpaid and a torture, then chain me to the wall.

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#3) On September 23, 2008 at 4:42 PM, TMFLomax (41.01) wrote:

Over the last six months or so, every time I've run across his commentaries or him on TV or what have you, I've come to the conclusion that speaking of bubbles, that dude lives in one. Reality disconnect... I guess.

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#4) On September 24, 2008 at 1:13 AM, TheGarcipian (37.33) wrote:

From Ferris Bueller's Day Off (1986)
Economics Teacher: Bueller? Bueller? Bueller?
Simone: Um, he's sick. My best friend's sister's boyfriend's brother's girlfriend heard from this guy who knows this kid who's going with the girl who saw Ferris pass out at 31 Flavors last night. I guess it's pretty serious.
Economics Teacher: Thank you, Simone

Clueless Economics Teacher? Perhaps Art does imitate Life after all.
--Gar

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#5) On September 24, 2008 at 2:33 AM, ajm101 (32.84) wrote:

The worst part is that he seems to be making up stuff as he goes along.  He clearly has no real idea what he's talking about.

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#6) On September 26, 2008 at 2:03 PM, bostoncelitcs (47.37) wrote:

This former hippie who didn't serve in Vietnam.....(does anyone know how he "avoided" the draft?).....  Makes his living off hollywood, but is a tool for the extreme right wing of the Republican Party........Ben needs to start sparking up a few bowls again if he thinks by just saying "oh we're not in a recession" everything's going to be allright.

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