An Analysis of Ben Stein's Beef with Goldman Sachs

I was perusing DealBreaker on Tuesday, looking for some dish on people I know, when I came across this post about Ben Stein's column in The New York Times.

For those who aren't in the know, Stein is an economist, comedic writer and Republican hack best known for his role in Ferris Bueller's Day Off.

In what year did collateralized debt obligation structured products comprised of subprime mortgages used to speculate in an overheated housing market bring down the global financial system? Bueller? Bueller?

Apparently, whilst observing the Baltimore Ravens blow yet another one on Monday night, I was caught unaware of the kerfuffle Stein's column caused in the blogosphere. And since I'm a leading light in the blogosphere - well, okay, not exactly "leading" (and not exactly a "light" either - ed.) - I felt somewhat compelled to comment on this brouhaha. Plus, I didn't know what else to write about Tuesday evening.

Essentially, Stein slammed Goldman (GS) economist Jan Hiatzus for being too bearish on the housing market, accusing Hiatzus of taking a negative position position because Goldman's trading desk is short subprime mortgages, amongst other things.

Now, correct me if I'm wrong, but I somehow recall Goldman Sachs and the rest of Wall Street being raked over the coals after the collapse of The Bubble c1999 for being too bullish, with a gazillion buys on everything under the sun - including the Talking Sock Puppet Companies which had no profits or cash flow to speak of - and sells exactly, zero goods. So now, when Goldman recommends investors sell garbage mortgages, the company is accused of pimping its book. Goldman says "buy," and it's criticized. Goldman says "sell," and again, it's criticized. Can Goldman ever win? (And it's cold comfort that the employees of Goldman Sachs are paid a mere $5 million a year on average in which to deal with the harrowing accusations under the intense glare of an economist-turned-comedian.)

It also seems to not have dawned on Mr. Stein that Hiatzus's call has generally been correct. But since when did being right matter, particularly to those trained in the dismal sciences (including yours truly - ed.)? The prognosticatory ability of economists make weatherman appear to have the precision of a mathematician calculating to the thousandth decimal of pi.

Further proving my point, Stein applies rigorous analysis to the housing market by proclaiming

So I started an e-mail correspondence with Dr. Hatzius, pointing out what I believed were a few flaws in his paper. Among them were his hypothesis that home prices would fall an average of 15 percent nationwide (an event that has never happened since the Depression [emphasis added], although we surely could be headed in that direction)

Thus, Stein's position is that since it hasn't happened in a really, really long time, it is unlikely to happen again.

The problem is that it already has happened, and is continuing to do so. According to the latest release from the National Association of Realtors:

The national median existing-home price for all housing types was $207,800 in October.

Compare this to a recent press release from the same organization:

The national median existing-home price for all housing types was ... down from July 2006 when the median was $230,200, the highest monthly price on record.

Indeed, July 2006 was and still is the highest monthly median price on record. Thus, my abacus and counting sticks tell me that housing prices have already fallen 10%. Tell me again what flaw Stein sees in Hiatzus's research?

Yes, yes, home prices have fallen 10%, but they could never fall 15%. That ... that ... that's just crazy talk.

Of course, like any good market cheerleader, Stein fails to acknowledge the nutty valuations house prices had reached.

Stein sort of reminds me of George Gilder, someone with little experience in market analysis telling us that markets should not go down.

Investors heed the advice of market cheerleaders at great risk. (And of the über-bears, too.) Concluding that something won't go down simply because it hasn't in a really long time is not a sound base for your investment decisions, and utterly bizarre given all we know about the history of finance.

Comments

[Eric Balkan]

I've seen Stein often identified as an economist, but Wikipedia says he worked as a lawyer and political science instructor before becoming an actor and pundit. It was his father, Herbert Stein, who was the economist.

[armadillo]

I saw him on Kudlow, and it seemed he was mixing two accusations
1: Goldman was pushing these "speculative"... securities during the top of the market while their econmist was bearish on the market and
2:now that they are short he is being recognized and getting even gloomier to push the market down and improve their short position.

Of course they were trying to dump these securities at the top and get short - don't we all - The problem is when they do that and have a fiduciary responsibility to their clients.

I guess it's all about transfer of wealth from misinformed losers to the well positioned rich smart guys.....

[Frothy]

"Stein sort of reminds me of George Gilder"

Ha ha! Not only are Stein and Gilder both crackpot market gurus, they're also both crackpot Intelligent Design creationism gurus too! Ben Stein's creationist documentary <i>Expelled</... will be released February next year.

Whereas <i>Expelled</... will stay relevant for less than zero minutes, we'll be able to point our fingers and laugh at Stein's crackpottery on the housing bubble for the next many years to come.