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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

Market Fluctuations and Subprime Morality

by Ben Stein

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Posted on Friday, December 7, 2007, 12:00AM

Long ago, when asked what the stock market would do, the famous financier J.P. Morgan, said, "It will fluctuate." How right he was, and how clearly we're seeing it recently.

The stock market has been on a wild descent, then a wild ascent, then a wild descent again. What to do, what to do?

Plenty of Liquids

Let me start with an anecdote. A few days ago, I had lunch with an old friend and her husband, who's a mortgage lender and builder of spec homes in Orange County, Calif. Two years ago, the couple thought they were rich. Now they're in a severe liquidity crisis.

The homes they built on spec aren't selling. The carrying costs in interest are eating them alive. Their mortgage business is extremely slow. Most serious of all, they didn't have a big liquidity cushion. They're continuously borrowing money at ever higher costs.

Frankly, I don't know what will happen to them. One alternative is for them to just give the houses they built back to the lenders. Another is bankruptcy. My own suspicion is that they'll sell the houses if they lower the price enough, and next time around they'll be a bit wiser about liquidity.

The Bucket Strategy

I know most of you aren't homebuilders and mortgage lenders, so I'm sure you don't face exactly the same problems my friends do. But as the market "corrects" and as the economy slows (if it does), liquidity is a lovely thing to have.

I've mentioned this many times before. I especially connect it with the fine "buckets of money" strategy of my colleague, Ray Lucia. His advice, somewhat simplified, is to keep a big pot of cash or near-cash so you can ride out slumps in the market for stocks -- or anything else you're in -- and not have to sell at the troughs. Like all of Ray's advice, it's darned good.

I know very well that it's tempting when the market is going up to plow your money into it and assume that it'll just keep going up. I do way too much of that myself. But the sad truth is that the market "will fluctuate," just as Morgan said. So, right now, I recommend that you take steps to build up a pile of liquidity in case we do have a severe stock market crunch or business slowdown.

Unwarranted Stock Jitters

On the other hand, neither now nor any other time that I know of is the time to bail out of stocks. (When I say "stocks," I mean broad indexes of domestic and foreign stocks, not individual stocks, which I find very dicey and hard to pick at any time.)

Indeed, I'm puzzled when I read that advisors are telling ordinary investors to approach the stock market right now with caution. What can that mean? Does it mean that when stock prices are high, you should approach stocks without caution? Does it mean that when stocks are low, you should avoid them?

As the historical record makes extremely clear (and my colleague Phil DeMuth and I have documented thoroughly in our book, "Yes, You Can Time the Market"), you make the best returns on stocks when they're down. So the time to buy stocks is when everyone is warning you against them.

Only do it if you can afford the loss of liquidity and a lot of time, though. It's entirely possible that it will take many months or even a few years for the stock market to calm down about credit jitters. But if history is any predictor, the people who buy and hold in this scary time will be well-paid for their efforts.

Tarnished Parachutes

In the meantime, let me switch gears and talk about moral responsibility. It's now clear that some of the major players on Wall Street were making fortunes bundling junky subprime mortgage instruments and selling this garbage into the financial markets. The heads of some of the major brokerages and investment banks approved of this conduct and reaped the rewards when the market was hot -- i.e., when the market was fooled by what was being sold.

Now some of these people are being fired. But when they leave, they get immense pay and benefits packages that would leave the rest of us speechless if we got them for good conduct.

There's something drastically wrong when a conspiracy of men and women can do this kind of damage to the financial well-being of the nation and get away with it. On a local level, hundreds of thousands of borrowers were sold on mortgages with terms they barely understood. Now some of them will lose their homes. As far as I know, punishment for this sort of misconduct is barely meted out at all.

A Broken Ladder

What's going on? Why aren't laws against fraud being enforced? Why do people get away with fleecing their neighbors down the street -- and their "neighbors" throughout the entire country -- without any sanction? What sort of system allows someone to leave an executive position rich after defrauding people to the tune of billions of dollars?

Where's the legal process here? Where's the basic accountability? Do we believe the ladder of law has no top and no bottom (as the Bob Dylan song goes), or do we simply assume that if a prosecution is complex we'll just let it slide?

Something very wrong is happening.

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238 Comments

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  • ERNEST W - Sunday, December 16, 2007, 2:16AM ET  Report Abuse

    • Overall: 5/5

    Right on Ben!

  • DGG - Saturday, December 15, 2007, 2:11PM ET  Report Abuse

    • Overall: 3/5

    What happpened to Buyer-Beware???!!! What about accountability of the consumer?? I agree with the comments on the inequities of the execs' behavior and payouts, but if borrowers didn't understand the contracts (mortgages) they entered into, as Mr. Stein wrote, then they should've searched until they found one they could understand. Nobody held a gun to their head on these financing options. And let's be honest here, you don't have to be a genius to know that some extreme risk exists somewhere when someone earning $50K/year is approved for a $600K loan. I would love to have a home twice as big as the one I have now, but it's obvious to me that basic financial principles would have to be set aside to do so. So I bought a home I could actually afford, being able to make payments on it regardless of interest rates perturbations and economic cycles. So much of America is absolutely foolish with their spending habits...total hyperconsumers living for today, paycheck to paycheck. So a bunch of these fools got caught up in the real estate tulip-bulb frenzy of recent...they got greedy and leveraged themselves to the hilt to get the absolute most house they could, and now I'm suppose to bail their sorry irrational butts out with my tax dollars by subsidizing their ARM loan rates so they can continue to live beyond their means and not be held accountable for their poor decisions. Score another campaign point for the Socialist politicians coming to the rescue and disposing of 300 years of proven economic theory that the long-term benefits of letting the market correct itself will far outway the short-term pain caused.

  • Yahoo! Finance User - Friday, December 14, 2007, 12:56AM ET  Report Abuse

    • Overall: 4/5

    I agree with Ben who thinks there is "something very wrong going on". There is....it is the total corruption of our political system by money. It has been going on for a long time,with increasing momemtum. Wherever you look you can see it. Politics,finance,sports,media,military,industry. Healthcare...you name it They are all intertwined, but the main driver is money, and the influence that it exerts on our spineless,corrupt politicians. Our empire is eroding away, just like our freedoms, and it is all due to corruption.

  • Yahoo! Finance User - Thursday, December 13, 2007, 7:08PM ET  Report Abuse

    • Overall: 5/5

    Does anybody out there really expect our politicians to offend the financial community by insisting on the prosecution of the miscreants? So long as our political system rests on the largess of the wealthy, the rest of us will be whistling past the graveyard!

  • Glen - Thursday, December 13, 2007, 6:03PM ET  Report Abuse

    • Overall: 5/5

    What? Are you suggesting that society should have ethics or morals? That is certainly not politically correct. Is it any surprise in our Darwinian society that these men should profit from the demise of others? After all we and our children have been taught this lie.... that our existence is nothing more than random chance of evolution, and self-actualization (or another way to say it 'survival of the fittest') is what we need to aspire to (according to Maslow). If that is making millions of dollars on the misery of others why is that a problem, after all these monkey men are simply 'self-actualizing’. Evolution has taught us there is no God, no Divine intervention in the creation and subsequent events in the world, and without that there is no absolute truth or ethics since how can there be with no God. Our schools are permeated with this nonsense. So I ask you this, why be surprised? Does the lion feel any pity for the poor baby gazelle as it is eating it alive? Nope, so why should a society with beliefs no more enlightened than the lion behave any differently? These misguided individuals are only following what they have been taught from youth and we as a society are reaping what we have sown. Given the morals of the more recent generations just wait another 20 years and you will think these guys are saints. Could it be Darwin got it wrong?

  • GlennT - Thursday, December 13, 2007, 5:55PM ET  Report Abuse

    • Overall: 4/5

    I don't know why those in charge did not see this coming. It is the very same problem that we had in the 80's with the savings & loans. Then it was overbuilding of apartment complexes and the value going down below the amount owed & borrowers could not pay their debts. This is just the same in that people were lent more than they could afford if the rates were to go up and borrowers could not pay their debts. Either way, the S&Ls and the lenders of today foreclose on something they can't sell for what is owed, the values go down even more, and they lose money. It just seems we don't learn from our mistakes even if people lose lots of money. At this rate, we'll probably see another dot.com bubble & another loan crisis that will happen before anyone notices. The bailout makes sure it will happen again.

  • Yahoo! Finance User - Thursday, December 13, 2007, 1:38PM ET  Report Abuse

    • Overall: 2/5

    Moral responsibility? Do criminals feel morally responsible? NO! That's why they are criminals. Where is the legal process you opine? Too busy trying to cover up its own criminal activity... a white collar viscious circle...

  • Yahoo! Finance User - Thursday, December 13, 2007, 8:17AM ET  Report Abuse

    • Overall: 5/5

    Ben, you are absolutely on TARGET! And now, the big boys are crying and asking for a bailout. Jail time and millions in fines would be most appropriate.

  • Missouri Mike - Thursday, December 13, 2007, 12:16AM ET  Report Abuse

    • Overall: 5/5

    Right on Ben!!

  • Yahoo! Finance User - Wednesday, December 12, 2007, 7:24PM ET  Report Abuse

    • Overall: 3/5

    There is no free market,contrary to those who believe it and loudly proclaim it here. We have all these government rules and regulations because when the markets were free the rich wolves were fleecing the lambs at light speed. Now that there are regs and oversight, such as it is, the wolves are still fleecing but at a much slower pace. The vast majority of critics of the recent subprime mess blame the government for not enforcing the rules and regulations. So much for that free market crap. The hedge funds do not want any oversight so that they can rape and pillage like the good old days of Joe Kennedy, the Rockefellers, and the other robber barons of the past. Many experts claim the current credit mess was caused by the hedge funds demand for high yield debt that greedy rich bankers were happy to supply, with a nice fee for themselves. Many of those subprimers reached for the brass ring and got burned but it wasn't they who bent the regulations or lending standards. So let's give them a little slack because for them this is a nightmare that may never go away. As far as the speculators go, I hope they lose everything they've got.The greatest days of the USA occured when the government stepped in and allowed the little guy to have a shot at the American Dream. Unfortunately the greed of the "educated" and the rich leaves little room for the little guy. No country can remain great without a thriving middle class, and if the rich keep it up there will be no middle class. Yes, the stock market is a ponzi scheme, but more importantly, it is the rich mans piggy bank. Those corrections, bubbles and whatevers, as they are called by the talking heads on CNBC etc, really are withdrawls of our money by the rich and the connected. We are told to keep that money in there so the richies can withdraw the maximum amount possible without killing the market or our desire to keep contributing. We poor suckers, who made this country great, go to work every day and put our hard earned money into the market so some greedy ass lowlifes in suits can have their mansions and mistresses and planes and yachts. Just as the richies need us to work our butts off to keep this country great, they also need us to keep our money in the market, to keep it and the world economy from collapsing. Buy and hold is the glue that keeps things from collapsing. The little guy is the one who keeps the markets and economies moving and stable. The rich guys are the leeches who suck us dry and get away with it. Back in 2000 when the markets were starting to fall, Wall Street was secretly telling their rich clients to get out of the market while telling us little people to not worry, but be happy. History has shown we should have been worrying. Statistics have shown that since 2000 the rich have been on a non stop spending spree. Now, where do you think they got this money?

  • Yahoo! Finance User - Wednesday, December 12, 2007, 5:50PM ET  Report Abuse

    • Overall: 5/5

    Right on Ben. Why do executives get paid for short term performance when the longer- term outcome of their mismanagement is near financial armagedon? If I were King, a CEO annual bonus/options/pay would be taxed today and 90% proceeds deferred in trust for five years so that shareholders have time to see whether the "vision" & "talent" they're paying for is just a short term ponzi scheme. If the companies earnings deteriorate over that time - the CEO's deferred "performance pay" get's prorated down - way down. There are ways to force responsibility into the system, weed out crooks and promote real corporate stuardship.

  • Raiddinn - Wednesday, December 12, 2007, 4:24PM ET  Report Abuse

    • Overall: 3/5

    It wasnt good but at least it isn't actively bad advice. IMHO we should bring the dollar back to its former glory. I vote for half percent increases in the Fed rate till all commerce grinds to a halt and everyone is brought to their knees. Down with all the idiots who wanted to own homes they cant pay for. The same with all the people who enter into contracts without realizing what they are doing. If you enter into a contract and you dont know what you are signing then you deserve to suffer for it. At least as long as you were given ample time to hire an attorney to look over the paperwork. If you cant afford to hire an attorney to look over the loan paperwork then you shouldnt be owning a house. People deserve to be offended. Raiddinn

  • john - Wednesday, December 12, 2007, 1:52PM ET  Report Abuse

    • Overall: 5/5

    Well spoken, and if investors sanction these actions by their investment with these entities and their brokerage , it speaks their complacency.

  • JeromyJ - Wednesday, December 12, 2007, 1:09PM ET  Report Abuse

    • Overall: 3/5

    Staying liquid with cash is just sound money management 101. Those who seek to have everything and satisfy their immediate desires are always...ALWAYS left to pay a price. I have zero compassion for the couple who greedily went after home after home thinking they could get more and more. You take a risk - you must be willing to pay the price if it turns around. To that end - capitalism has always worked.

  • Sd - Wednesday, December 12, 2007, 12:55PM ET  Report Abuse

    • Overall: 2/5

    "What's going on?" It's the American way, Ben. You win the game by adjusting the rules in your favor or otherwise taking advantage of the system. BTW, thanks for not tacking on an encouragment to join the military or a pitch for annuities this week.

  • Yahoo! Finance User - Wednesday, December 12, 2007, 12:34AM ET  Report Abuse

    • Overall: 2/5

    The article is well liked by smartly echoing public complaints, but didn't analyze the cause or provide suggestions or solutions.

  • John - Tuesday, December 11, 2007, 9:09PM ET  Report Abuse

    • Overall: 2/5

    Where were all of these "insightful" comments two years ago? Now that the horse has left the barn, everyone wants to sound like a genius in retrospect. Particularly those who were wrong the first time around. As I recall, however, Mr. Stein was telling us only a few months ago how incredibly strong the world economy was, how the subprime mess was being exaggerated, and how we should keep buying stock. Oops!

  • Yahoo! Finance User - Tuesday, December 11, 2007, 8:06PM ET  Report Abuse

    • Overall: 5/5

    The policeman whose diligence keeps markets free has been sleeping on the job. The next administration will have the tough job of waking him up without wrecking the incentives the market provides.

  • dave - Tuesday, December 11, 2007, 8:01PM ET  Report Abuse

    • Overall: 4/5

    If we want to preserve capitalism, we had better do something about this overly paid CEO business. The tide will turn against capitalism on this point alone, otherwise.

  • Yahoo! Finance User - Tuesday, December 11, 2007, 4:12PM ET  Report Abuse

    • Overall: 3/5

    10 years from now remove the words "sub-prime mess" and insert the words "Social Security mess". This is a Ponzi scheme that will make the SL crisis and the current sub-prime mess look like child's play. There is no Social Security Trust Fund. The Federal government has treated the social security trust fund in exactly the same way as Wall Street has valued sub-prime loans. Its time for the Left to reduce their political Carbon foot print to zero and stop breathing!

  • John K - Tuesday, December 11, 2007, 3:29PM ET  Report Abuse

    • Overall: 5/5

    Lovely - Ben never said that his friends deserve to be bailed out. He said they will sell, for a loss, and hopefully learn a lesson. As they should.

  • Charles - Tuesday, December 11, 2007, 3:04PM ET  Report Abuse

    • Overall: 3/5

    Great point about golden parachutes and executive pay; this really should have been the main focus of the article. It boggles the mind that corporations pay their head honchos tens of millions of dollars - sometimes nine figures - when they leave a company in worse condition than when they arrived. It's even more sickening that so many believers in the free market system enable such "suits" with attitudes that suggest that that's how business is supposed to work. It isn't supposed to work like that, at least not to me. There is no reason for any one person or small circle of executives - who presides over the failure of a business to make its numbers - to be paid zillions of dollars when thousands of its workers are being laid off. Executives need to suffer with everyone else. Pay them their salaries (which, in many cases are also way too high), but not these obscene "bonuses" for playing the hatchet men. It should be the case that everyone rejoices when more people find and hold jobs, and are paid well. It seems to be the reality that when the opposite is the case, investors and board members are happiest. It is robbery, pure and simple.

  • MarleneL - Tuesday, December 11, 2007, 2:39PM ET  Report Abuse

    • Overall: 5/5

    Ben is right, as usual. But I don't think anyone in the rarefied financial world he inhabits, the world of the laissez-faire government haters, will try to find a way to police these wealthy criminals. The real moral hazard is always the little guy getting screwed, not the bailing out of the snickering fatcats. If things get bad enough, there could be a revolt. The Chavez-types of this world are getting bigger audiences.

  • James - Tuesday, December 11, 2007, 12:29PM ET  Report Abuse

    • Overall: 1/5

    In summary, Ben's friend (a mortgage broker/lender, who presumably never booked an aggressive/pricey mortgage, and builder of spec homes) is to be pitied and bailed out, but Wall Street financiers (insert stereotype here) are to be reviled and hated. Rogues, speculators, and fools of all stripes deserve the comeuppance that is targeted on them like a missle. The true scandal is the Fed's shameless effort to devalue the dollar and bail out Wall Street and Main Street speculators to the detriment of the very savers Ben encourages us to be.

  • Da Big Guy - Tuesday, December 11, 2007, 10:44AM ET  Report Abuse

    • Overall: 2/5

    Without being longwinded as some singing praise here, it seems that this article takes swipes at lenders, friends, banks, CEO's and in a round about way offers that the market can be turbulent and cyclical. Nice try Ben, but I am still quite disappointed. I know there are many who revere your ramblings as the gospel..COUNT ME OUT!

  • John S - Tuesday, December 11, 2007, 10:37AM ET  Report Abuse

    • Overall: 5/5

    Preach on, Brother Ben!

  • Yahoo! Finance User - Tuesday, December 11, 2007, 10:24AM ET  Report Abuse

    • Overall: 5/5

    Nobody, especially fired CEOs and COACHES, should be rewarded with a golden parachute for a year or two of CRUMMY PERFORMANCE!!!!!

  • Greg&#39;s Page - Tuesday, December 11, 2007, 1:23AM ET  Report Abuse

    • Overall: 4/5

    I believe we need to look at this in a simple way - supply and demand. Who is at fault for the demand going out of control? Is it the real estate agents and mortgage brokers, who convinced people that they needed to buy "you will never get a chance again"? Or how about abusing the system and putting people into homes they knew they couldn't afford? Is it the lenders, who came up with creative ways to get people approved (people who shouldn't even be thinking about owning a home)? Or how they approved loans they knew they shouldn't? Is it the investors (Wall Street), who flooded the market too much capital? Is it the government, who should've created regulations to prevent this from happening (how could they have not seen this seen this coming)? Is it the Federal Reserve Board, who raised rates so slowly that the effect it wanted to have came too late (1/4 % rate hikes were too mild). These are all great places to look and to point the finger. I think they're all responsible for their part in this mess, however we're missing the main reason why this happened - GREED! The majority of people who bought in 2005-2006 thought they would have huge amounts of equity growth, so they didn't care about the price they paid - they just wanted to make a killing like their neighbors and friends - they were jealous. Or how about the people that sold their old home for a nice profit, then moved into a bigger, fancier home that they didn't belong in - only because their greed told them they could now live the "high life". They thought they were real estate tycoons! How about the people who should be renters (not to sound judgemental, but some people should not be homeowners), however their greed told them they could afford to own a home - the strange thing is that these same people didn't think about buying in 1992-2002 when homes were affordable ... intersting. This is not meant to be a slam against anybody. What is important is that we realize that it was the individuals who signed their loan documents. They made the choice and nobody forced them to buy. Some may have been tricked, but who initiated the homebuying idea in the first place? Think about how simple the concept of a mortgage is - you find a home that is in the price you can afford - monthly payments and down payment fit your budget. You also choose the type of mortgage that allows you to keep within you budget 1, 3, 5, 10 years down the road. You sign a document that states "I give my word that I will pay this loan back". If you don't pay it back, the lender can sue you. You should have honor in your word, so you sign your mortgage. I believe this is where the majority of the foreclosures are coming from - people who are not willing to honor their word - they do not want to cut back on the niceties. They are not doing everything in their power to keep up with their payments. How about a second job as a janitor, or at McDonalds? How about selling their nice new car and taking the bus? How about cooking food at home and not eating out so much? How about selling your valuables? The problem lies in the idea that they were cheated - their home is not worth what they paid and they are willing to dishonor their name and take the easy way out. I think this is one of the worse parts of our society. Shame on us for creating this belief. Shame on us for allowing this to happen. Shame on us for spending other people's money to fix the problem.

  • Will - Tuesday, December 11, 2007, 12:41AM ET  Report Abuse

    • Overall: 1/5

    Ben get real. Why blame Wall street for the subprime mess. either blame everyone, borrowers included or blame no one. Wall Street is experiencing as much pain as anyone and your comment regarding the money they make when they are fired is misguided. In addition, your comments regarding Wall Street hedges shows you have no idea how Wall Street works and the purpose they serve. Appears your understanding of what is going on is 100 miles wide and a micron thick.

  • Brussels - Tuesday, December 11, 2007, 12:08AM ET  Report Abuse

    • Overall: 1/5

    Ben Stein writing about moral responsibility is to laugh. Among other things, he was one of Dick Cheney’s water carriers who helped sell America on the Iraq war. I heard him the radio more than once explaining how the grateful Iraqis would welcome us as liberators. A draft dodger himself during the Vietnam War, he helped Nixon sell us that fiasco as a White House speechwriter. Eyewash, hogwash, criminal wars of aggression – you will pitch anything to turn a buck, huh, Ben? You’re an amoral hypocrite and a lousy game show host to boot.

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