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| Ben Stein:Irrational Times Call for Rational Measures |
| 2008-03-17 |
| Markets are made up of human beings, and human beings can be irrational. They can be irrational on the upside, they can be irrational on the downside. We saw "irrational exuberance" in the late 1990s, and it led to a crash. I believe we're now seeing highly irrational pessimism in the markets, especially the credit markets. The gloom comes from the bad results that banks and other lenders got when they loaned money on mortgage obligations in the form of collateralized mortgage obligations. These instruments were never meant to be as safe as AAA bonds, but they were thought to be much safer than they turned out to be. There have indeed been major defaults in mortgages. Just as important, there's been wild speculation on indexes tied to mortgages, and this speculation by itself has led to immense losses in mortgage-linked investments. To a large extent, these losses will be recovered when the subject properties are sold and when speculation goes to the long side. But for now, national and local banks are sitting on big losses. This has scared them about lending on anything at all. It shouldn't, but it does. It's sort of like the old saw about the cat: Forever after jumping on a hot stove, it'll be scared of hot stoves. But it'll also be scared of cold stoves. So, lenders are terrified of loans even to very sound borrowers. This reluctance to lend is causing a credit crunch, and this is terrifying markets and newspapers everywhere. This fear has knocked down the Dow by over 2,000 points from its October high. It's led to strong fears of a recession and to a slowdown in hiring and investment as businesses cut back their borrowing and spending. By this point, the banks and bankers are terrified that they'll be fired if they make bad loans, and that if by some lightning strike of improbability their loans to good borrowers fail, they'll see their banks fail altogether. Again, that's irrational human fear at work. The problem is that even irrational fear can have real consequences, and can indeed cause a serious recession -- even if the actual losses in mortgages aren't large enough to cause one by themselves. In fact, that's what's happening right now. So what to do? First, bear in mind that irrational markets eventually get a taste of reason. Also bear in mind that, as Warren Buffett says, markets are at first a voting machine, but always eventually become a weighing machine. Reality will triumph, and the credit markets will get their act together, loans will start to be made, and credit will begin to flow. But why not get the healing process started today instead of waiting for a bad recession? Why doesn't Mr. Bernanke call in the big bankers and tell them he'll make sure none of them fails? Why not tell them the Fed will always be there to bail them out and recapitalize them if need be? Why not stop solvency-risk fears today? Why wait until another day? Why wait until a million or 2 million more people lose their jobs or homes or both? Further, why not tell the banks that a condition for recapitalizing them is much stricter regulation about lending policies -- not lending against bad collateral, not lending to borrowers with no credit history? Why not also impose rules about executive compensation to keep top brass from looting their own stockholders even as they kill their own companies? There's more to it than that, also. But as Ben says, let's leave that for later. It's a myth that all regulation is bad. In banking, regulation saves greedy, foolish people from killing their own banks and the economy in general. Let's save the banks, save the economy, and lay the foundation for a smarter tomorrow -- starting today. And then let's investigate what role speculation by hedge funds against the credit markets has played in our current problems. Some killers have made a bundle out of our troubles; let's find out exactly what they did. It's going to be a scary story, but that's fear for another day. |
| Posted by:Nimble Spemble |
| #7 A 9% prime rate will put those barely able to hold on at 6% straight into bankruptcy. I grant that they were fools to leverage themselves to the hilt on the assumption that bigger fools down the road would pay for it, but even so. Other than that, I'm sure Nimble Spemble is right -- so many small borrowers spent their refinance money to pay down credit cards that they then ran up again, so many small investors bought into mortgage-based derivative funds they had no possibility of understanding, so many managers of said funds (who didn't really understand the complexities either) long since spent their bonusses on living the good life. If I recall correctly, Mr. Soros specializes in currency speculation, so his probable bet against the dollar would be derivative of all the rest, but not a root cause. Not that he isn't cackling like a mad hen these days, and considering how best to spread his new excess amongst the political candidates. And let's not forget, the European banks are in even worse shape, not only because they speculate more, but because a couple of low level traders lost at least billions in imaginary trades. |
| Posted by: trailing wife 2008-03-17 19:22 |
| #6 I'm with E.H. TIme for some consequences and a 9% prime rate. A little intense sufferning now, a lot less prolonged agony later. |
| Posted by: no mo uro 2008-03-17 15:03 |
| #5 There's no doubt there's a Soros taking advantage of this problem but that doesn't mean he created it or that it's his fault. If you want to see the culprit, look in the mirror. I've seen the enemy and it's us. |
| Posted by: Nimble Spemble 2008-03-17 14:54 |
| #4 May as well crack that investigation starting now. I am certain you will find a money hole pointing to soros or some other clown like him. |
| Posted by: newc 2008-03-17 14:03 |
| #3 Ben Stein is irrational. If the FED bails everyone next time will be much worse. It's painful but the bear muct run. |
| Posted by: Eohippus Hupomock2152 2008-03-17 14:02 |
| #2 Deleveraging is going to be a painful but good thing. Ben Stein is a smart guy. Follow the money someone is making a killing on all this turmoil. |
| Posted by: Sock Puppet of Doom 2008-03-17 13:00 |
| #1 For every one who leaves the field, someone else says, "There's money on the table..." |
| Posted by: M. Murcek 2008-03-17 11:42 |