What Is Ben Stein Smoking?

One of the great things about being on holiday in Europe is that there's no chance of running across a Ben Stein column by mistake. But this morning I made the mistake of noticing that my new colleague, Mr J. Flack, is applauding Stein for made "a lonesome point of great relevance" with respect to subprime loans.

The questions rose, unbidden, in my mind. Had Stein's brain been invaded by aliens? Did he manage hit on something germane in much the same manner as a stopped clock tells the right time twice a day? Thus did I find myself, on my first day back at the blog, reading Ben Stein, with predictable results.

For it turns out that Stein is completely wrong, yet again: can anybody explain to me why this man still has his column?

The point which impressed my pseudonymous colleague seems to be that home ownership is "the bedrock of the American dream" (Stein), or "the most personally and financially enabling of endeavors" (Flack). To which I can only say: Not if you're a subprime borrower, it ain't.

I just came back from Germany, where millions of people regularly walk into their homes and find their own dogs waiting for you there. In Germany, as in the US, this is a major blessing. But Ben Stein seems to think that this major blessing is impossible without homeownership, which is ridiculous. A dog neither knows nor cares whether a home is owned or rented. At the moment, homes still cost more to buy than to rent. Which means that a renter has more money to spend on himself, and his dog, than does an owner, even if the owner is a prime borrower.

If the owner is a subprime borrower, the situation is much worse. Subprime mortgage rates can easily get into the double digits, and homeownership makes very little sense in that situation. Take a look at the default settings in the New York Times fantastic buy vs rent calculator. With a mortgage at 6.25%, buying is better than renting after 11 years. With a mortgage at 11.5%, buying is never better than renting.

Stein continues by wheeling out one of the most misleading statistics there is: "the percentage of those who have defaulted is still fairly small, possibly 10 percent to 15 percent of subprime loans, and maybe less," he writes. I would call this disingenuous if I didn't believe that Stein simply doesn't get the truth: that most subprime loans are refinances, and therefore the percentage of subprime loans in default is much lower than the percentage of subprime borrowers in default. (A refinanced loan, of course, is paid off in full, while the borrower remains in debt.) What's more, the big problem, everybody agrees, is not now but rather in a few months' time, when most of those adjustable-rate loans (and there were precious few fixed-rate subprime loans) start to adjust upwards from their teaser rates.

Stein thinks, against all the evidence, that "the experiment with granting loans to less-qualified buyers worked" – clearly, it's far to early to say that. And he then disappears off into cloud-cuckoo land, saying that the cost to everybody else of the subprime debacle "will be whatever government programs are enacted to bail out borrowers in trouble". Er, no: the cost will be huge, even if there are no government bailout at all. That's the problem with credit crunches: good credits get crunched along with the bad.

And the idea that "those who lent the money get away pretty much scot-free" – that's just hilarious. Can Stein point to a single subprime mortgage lender which is remotely unharmed? Most, it seems to me, are bankrupt.

I pretty much gave up reading the column at that point. But I did skip down to the end.

If I were the editor of the business section for just one day, I would run one immense headline: “Everything Is Going to Be Fine. Go Back to Work.”

Yes, Ben, if you're one of the handful of Americans with a lot of assets and no debts to speak of, then I'm sure everything is going to be fine. Oh, wait, you are. Good for you. But for the rest of us, credit matters a very great deal, and we can't look with equanimity at a housing collapse and consider it little more than a buying opportunity. You might be able to afford homes all over the country; I daresay you're haggling on one or two right now. But most of us are struggling to afford just one.

Comments

[J.E.C.:]

Mr. Salmon:
Quite simply, Mr. Stein is correct and you are wrong. Better check the facts. Then make sure your brain is engaged before you put your mouth in gear.
J.E.C.

2007 Sep 11 11:44 AM

[JasonArgonaut:]

Your re-buttal to Stein is comical... and wreeks of Naiveness

Get an education man, then maybe you can afford a house.

Try Re-reading what you printed to any decent financial analyst, and you will not come up with one ally. Everything you stated is wrong... You would think out of sheer chance, you would come up with one good point... However, I can safely say in all confidence, that your column is pure idiocy.

Bye! Bye!

ps(I am not a big fan of Stein either, however, next to you... He is Einstein re-incarnated.) What a Putz!

2007 Sep 11 02:18 PM

[MF:]

Mr. Salmon took the quote out of context "the bedrock of the american dream" is preceded by "is generally considered" , and yes, its true the way Stein states this in the NY Times article.

Salmon also blankly states that "homes still cost more to buy than to rent". While that is the case in most major markets, that doesn't apply to everywhere but he doesn't make a distinction.

This article is weak on substance and high on borrowing the celebrity of Ben Stein to drive readers to it. It also feels like one of those people that goes to another country and tells us how much better it is there. I am surprised he came back from Germany.

MF

2007 Sep 11 03:27 PM

[Eric Balkan:]

Everything Felix stated is wrong? That's pretty harsh.
"Subprime mortgage rates can easily get into the double digits, and homeownership makes very little sense in that situation."

That sounds right to me. When these ARMs reset, they often do reset to rates that are in double-digits.

A lot of these refinancings only made sense in a world where real estate prices keep going up forever. Here on planet Earth, which I invite Ben Stein to visit sometime, there are a lot of homeowners who would indeed have been better off as renters, until they could have really afforded to buy a house.

2007 Sep 11 04:10 PM

[nightrader:]

Thank you for writing this column. I'm sick of reading Ben Stein's contradictory columns as well. Now would you write one about Jim Cramer. Get him off the air Please!!

2007 Sep 12 12:45 AM

[gordon:]

I find myself using this site for FACTS>
www.financialsense.com...
Maybe Stein should! If most adjustables are based on LIBOR, the re-set rates could be at 10% or more. Incomes will not support it, period. And no, Stein isn't smart enough to have knowingly said " loans" instead of "borrowers". Financialsense has given FACTS that many home equity loans in the last year have been withdrawals in order to pay ordinary living expenses, having credit cards tapped-out. Consumers are also switching to multiple cards to take advantage of higher-limit introductory promos.

2007 Sep 12 01:44 PM

[gwthomp500:]

Mr Salmon,

What are you smoking? I think I would like to get some. You cannot make a comparison in this manner. It is too simplistic. You are comparing rent cost with interest cost and taxes, which is missing the most important reason to own a home.

Home ownership provides protection against inflation risk. Renting provides no protection. When you buy a home, you are making a bet that inflation will occur because you are buying in current dollars. Rent will go up according to inflation, maybe not now, but eventually it will happen.

Let me remind you that only once in the past hundred years has some kind of price inflation not occurred.

Mr. Salmon, maybe in the short term we are experiencing a price anomaly that will give you a short term gain, but trying to time Real Estate is like trying to time Stocks. It will not build much wealth over the long term.

2007 Sep 12 06:13 PM

[mci:]

Hilarious. A guy who thinks "wreeks" and "Naiveness" (capitalized no less) are words advises the writer to "get an education."

What a moron.


On 2007 Sep 11 02:18 PM JasonArgonaut wrote:

> Your re-buttal to Stein is comical... and wreeks of Naiveness
>
> Get an education man, then maybe you can afford a house.
>
> Try Re-reading what you printed to any decent financial analyst,
> and you will not come up with one ally. Everything you stated is
> wrong... You would think out of sheer chance, you would come up with
> one good point... However, I can safely say in all confidence, that
> your column is pure idiocy.
>
> Bye! Bye!
>
> ps(I am not a big fan of Stein either, however, next to you... He
> is Einstein re-incarnated.) What a Putz!
>

Sep 20 03:04 PM

[mci:]

Quite simply, you're an imbecile blowing smoke. If you can't say why he's wrong (which you can't because he's not, and aside from which, you're an imbecile) then shut the fuck up.


On 2007 Sep 11 11:44 AM J.E.C. wrote:

> Mr. Salmon:
> Quite simply, Mr. Stein is correct and you are wrong. Better check
> the facts. Then make sure your brain is engaged before you put your
> mouth in gear.
> J.E.C.

Sep 20 03:07 PM