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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

Irrational Times Call for Rational Measures

by Ben Stein

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Posted on Friday, March 14, 2008, 12:00AM

This is going to be a bit controversial. Bear in mind that I often make mistakes and could be wrong about some of this, but it's all food for thought.

Irrational Pessimism

First of all, 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.

Beware of Cold Stoves

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.

Fear Working Overtime

So, lenders are terrified of loans even to very sound borrowers. Just to give an example, banks are scared of lending even on Fannie Mae and Freddie Mac bonds -- even though these bonds are backed by the federal government and can't default by any likely standard.

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.

Let the Healing Begin

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?

Regulation to the Rescue

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.

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  • Yahoo! Finance User - Friday, March 21, 2008, 4:31PM ET  Report Abuse

    • Overall: 1/5

    agree with oboe234...what is the matter with this country...where are the values that have meaning...this entire mess is based on greed...I have owned sevral homes and always had to have the money to pay for them..the debt ratio, the incme etc etc...this was designed by greed for corp and other bankers to make a quick hit...and the people who played the game all thought they were so freakin smart using "other" peoples money etc. and playing the big time investor...i say let the eat dirt!..They do not deserve a break...you act stupid you pay...these individuals had the wants, big house, take equity, buy more toys , impress the friends and neighbors...why not...they never are held accountable for their actions. If you can 't pay you don't play...it is that simple,..there is no god given right to own a home, try looking around the world!...You earn the right by your actions and your judgement and your ability to make siound ration choices. I have listened to friends whine about losing everything...the same friends that made fun of me because I would not spend for the vacation on "plastic" and I would not buy the 4,000sq foot house that was not priced appropriately...now they are out, my home is paid for....and becuase I did the right thing ...I should feel sorry for them and let evryone slide,...no frekin way...they deserve to be where they are ...they earned it!

  • Yahoo! Finance User - Friday, March 21, 2008, 1:59PM ET  Report Abuse

    • Overall: 5/5

    You don't see the Fed Bailing out Farmers & Home owners in time of need. Cut the rate? leave it be it's low enough to generate from the prior decrease. Regulate pricing for starters, wheat, corn, soy, gas... everyone whos selling "Futures" is making a mint on business' strugling to pay for product. What ever happend to "WE THE PEOPLE"

  • C - Friday, March 21, 2008, 1:32PM ET  Report Abuse

    • Overall: 1/5

    Enough with the bailouts! Let's save the economy by allowing these lenders to fail. A failure would speak more directly to the greed and lying these lenders enjoy. They made bad loans, misleading borrowers about ability to repay, coercing appraisers to value higher! Then they sold off the risk, sliced and diced, as something less risky. They should be punished! As we see justice served in the marketplace, demand for credit will be met by suppliers of credit. We already have regulation, but now Fredie and Fannie’s regulators are lifting reserve requirements! This is crazy! Yes, stronger regulation would be good. But it should be applied after the bad apple lenders fail and go away. Don't force taxpayers to pay for their greed and lying? Stop forcing taxpayers to pay for corporate profits!

  • Alan S - Thursday, March 20, 2008, 3:08PM ET  Report Abuse

    • Overall: 5/5

    Right on! What a great dose of thinking on your own! It's refreshing to hear someone from the media that wants this thing over! So many times a day we are reminded of the negative finacial stories AND told to expect more bad news comming ( they are like Prophets not reporters). For the average person this news becomes fact (self fulfilling prophecies). People who listen to the media report economic slowdowns and then change / reduce thier spending habits are promoting the slowdowns! Which could be avoided. Housing will stabilize and the banking industry will return to major profitability.

  • Yahoo! Finance User - Thursday, March 20, 2008, 2:43PM ET  Report Abuse

    • Overall: 5/5

    The R-word (Regulation), done right, will lessen the R-word (Recession) from occuring in this way again.

  • Andrew - Thursday, March 20, 2008, 7:17AM ET  Report Abuse

    • Overall: 1/5

    Well, Ben, you are right about one thing here. It's controversial. It is NOT a myth that all regulation is bad. The true free, unfettered, marketplace ALWAYS does a better job of rewarding good decisions, and punishing bad ones. ALWAYS. The typical scenario is: Problems arise because of government involvment in the marketplace. Then, what do people call for to solve the problem? Why, more government involvement, of course! The housing bubble, and the dot-com bubble, and the 'busines cycle' in general, are all caused by the Federal Reserve's loose monetarty policy- translation: inflation. Ron Paul was (is) right- the Federal Reserve should be abolished; not given more power.

  • Harry The Man Hartley - Thursday, March 20, 2008, 5:49AM ET  Report Abuse

    • Overall: 1/5

    No bailouts!!!! Who do you think ends up paying for this debacle. You and Me! Let these greedy rich feel the pain of their reckless greed and insane risk. NO BAILOUTS FOR THE RICH!!! NO REWARDS FOR THE STUPID!!!

  • surin - Wednesday, March 19, 2008, 10:03PM ET  Report Abuse

    • Overall: 2/5

    I respect Ben Stein but this time he is not looking smart. The question is "How solvent the investment banks are?" Housing inflation was 15% annually for the last 5 years compared to 2% in general. This mean that housing price has gone from 100 to 200 in five years while other things have gone from 100 to 115 only. To correct the housing price, it has to come down 40% that is from 200 to 120. This will take 2 years to happen and after that another five years to build confidence in housing. It's a simple math, now bankers know it best.

  • Yahoo! Finance User - Wednesday, March 19, 2008, 7:45PM ET  Report Abuse

    • Overall: 4/5

    As other commenters have noted, Ben did downplay the seriousness of this subprome mess a few months ago. But statistically he may have been right then and is underscoring thepoint now. The other day, when Bear Stearns began circling the drain, Morningstar analysts offered the opinion that Stearns' mess was more about panic than a real crisis in the company - exactly Ben's point. As with my 2.5 year old granddaughter, maybe the financial system needs a timeout!

  • Yahoo! Finance User - Wednesday, March 19, 2008, 12:40PM ET  Report Abuse

    • Overall: 1/5

    Awful. Simply awful. As another reader noted, this is the same guy who said the subprime mess was nothing to worry about because, like a complete chump, he didn't realize mortgages had been leveraged. I used to like BS, but he has continuously embarrassed himself in this crisis. If reversion to the mean counts for anything, Buffett worshiper, we have a lot further down to go.

  • Karen - Wednesday, March 19, 2008, 12:47AM ET  Report Abuse

    • Overall: 5/5

    It's not making loans to subprime borrowers that are the problem. It is inflexibility on the part of the lender. It is an inflexibility that bankers created by making it more difficult for people to file for bankruptcy. Lenders don't think they need to be flexible since they (or so they thought) had the upper hand. Until everyone to whom they made loans to started to default. Bankers make money through monthly payments, lawyers make money through fees. Lawyers went on a scare campaign to scare up some business. The real estate market softened and then took a precipitous fall. If bankers/brokers were more willing to help the people to whom they made loans to they wouldn't be facing such a dire situation. And so it has to ride out. This is not an unexpected development. What is unexpected is the severity brought on by all this irrationality and Marxists out there.

  • Yahoo! Finance User - Tuesday, March 18, 2008, 10:52PM ET  Report Abuse

    • Overall: 1/5

    I bet this guy won't be around when the US economy turns around again.

  • STEPHEN - Tuesday, March 18, 2008, 10:03PM ET  Report Abuse

    • Overall: 3/5

    i hav great respect for ben stein. but this is the same guy that months ago in fortune that the subprime mess was much to do about nothing. i think reality is is that it has been a virus throughout the entire financial world - has it affected you personally??

  • Yahoo! Finance User - Tuesday, March 18, 2008, 5:34PM ET  Report Abuse

    • Overall: 3/5

    Pretty complicated situation gets thicker ... the fed steps in and saves the DAY and maybe the economy,but only in the short term. What happened to the mutual funds that had to bail out of Bear, some at losses? What happens to the individual investors on Main Street who see their funds drop NAV because Bear's CEO said there's no trouble within 5 days of a complete melt-down? If you think he's the only one doing this, just wait till the other shoe drops. Then they'll find out they've just been whistling past the grave yard. For anyone to think that this is close to being over, just wait until the fed decides to put a gun to another company's head (and rightfully so). The Rube Goldberg financial reporting from these big investment banks has to end now.

  • LyleD - Tuesday, March 18, 2008, 5:20PM ET  Report Abuse

    • Overall: 4/5

    It is about time someone representing the establishment understood the risks involved in the "free trade means no regulation" crowd. Greed will prevail in markets without proper regulation. Just witness the past 7 years!

  • Chester K - Tuesday, March 18, 2008, 4:50PM ET  Report Abuse

    • Overall: 2/5

    "Why not tell them the Fed will always be there to bail them out?" How about so banks and funds finally start taking risk into account. How about so we don't create a massive moral hazard? If someone is always there to bail you out, why not go on a crime spree?

  • TOM - Tuesday, March 18, 2008, 1:52PM ET  Report Abuse

    • Overall: 5/5

    FDR said it best---All we have to fear is fear it's self. 24/7 news is killing us with fear.

  • El - Tuesday, March 18, 2008, 1:35PM ET  Report Abuse

    • Overall: 5/5

    Rational words in an irrational time. Even if Ben is not correct completely, he is calm. If you can keep your head when all about you... so true.

  • Phil B - Tuesday, March 18, 2008, 11:13AM ET  Report Abuse

    • Overall: 2/5

    Sorry, Ben, but Freddie and Fannie are not backed by the Federal government. Well, OK, Congress can earmark $2.5 billion per company (these are private companies), but their total assets are over $1 trillion dollars. So if these companies' assets lose 15% of their value ($150 billion), Congress has the ability to raise $5 billion in liquidity, which has to be paid with taxes eventually. Not exactly what I would called "government backed." This is a huge fallacy of which the vast majority of public is unaware. Also, why is it that no one realizes that low interest rates caused "irrational exuberance" in the housing market - driving up prices to unrealistic and unsustainable levels - and that these mortgage-backed securities are now worth much less than were sold for because of 1)foreclosures 2) the assets(houses) are worth less than the mortgages. Flipping houses became a career choice (and a HGTV show) and a lot of people got burned with inventory when the market hit the peak and turned on them. One other thing - why not let these banks fail, Ben? All of a sudden you're a socialist? The free market says if you make dumb decisions you get punished. If we take away the punishment - moral hazard - people will make riskier (dumber) decisions that they otherwise would. I thought a smart guy like Ben would realize this.

  • Yahoo! Finance User - Tuesday, March 18, 2008, 10:18AM ET  Report Abuse

    • Overall: 5/5

    I agree. I've been saying this for days now. Fear has caused many stocks to drop to unreasonably low prices. Unfortunately, many people want to continue spreading fear because: A) They have a vested interest (hold short positions), and B) They want the current administration to look bad.

  • feighker10 - Tuesday, March 18, 2008, 9:57AM ET  Report Abuse

    • Overall: 2/5

    For a sobering look at what's happening, I'd refer you all to Downstream Ventures Ezboard site about Peak Oil, Petro & Energy and read post called Stagflation/hyperinflation or just the end of your way of life. Kudlow had it closer with need to protect the dollar.

  • Joe - Tuesday, March 18, 2008, 9:54AM ET  Report Abuse

    • Overall: 2/5

    Average Intelligence __________________ Mentally Retarded Creationists (Ben Stein)

  • ken - Tuesday, March 18, 2008, 9:47AM ET  Report Abuse

    • Overall: 1/5

    Ben Stein, game show host, Nixon speech writer, darling of creationists, calling for rationality? It's an embarrassment that Yahoo continues to feature his drivel.

  • contraband - Tuesday, March 18, 2008, 9:44AM ET  Report Abuse

    • Overall: 1/5

    Ben your an idiot go back to tv

  • Yahoo! Finance User - Tuesday, March 18, 2008, 9:36AM ET  Report Abuse

    • Overall: 2/5

    While some stocks do seem oversold on panic, there are real problems brewing in an economy where many true and real capital losses have occurred and will cause rippling effect.

  • Leonard - Tuesday, March 18, 2008, 9:29AM ET  Report Abuse

    • Overall: 2/5

    Ben, I was with you until the Healing. Some Regulation to control greed would be welcome but bailing out private businesses is not the answer.

  • abe - Tuesday, March 18, 2008, 9:20AM ET  Report Abuse

    • Overall: 4/5

    Ben Stein for President

  • Nick S - Tuesday, March 18, 2008, 9:19AM ET  Report Abuse

    • Overall: 3/5

    Ben, I have been involved in the credit markets for many years. But, the credit that I managed was UNSECURED. I only wish that I had a a lien on a property or a deed like many of these mortgage banks have. The issue here is that they were loaning $400,000 against a piece of real estate that was only worth $300,000 at best. So, that means that their net loss will be 25% of the amount loaned (after they kick-out the default party and resell the foreclosed property). Let me tell you, when my customers defaulted on their debts, my business generally lost 100% of the oustanding debt. So, people like me had to be more cautious on the front end instead of the back end. Now, before everyone panicks and suggests that the sky is falling, just realize that it could be worse. Having said all that, the fundamental problem with the mortgage banking business (or any business) is greed from the top down. Senior management is generally rewarded on the short term; whatever they can show for this quarter or this year...then they get a big fat bonus. They also realize that they are taking risks and making bad decisions that will most likely go sour in 4 to 7 years in the future...and by then, like any good corporate mercenary, they will be long gone and running another company into the ground, while collecting bonuses in the same manner. Bear Stearns' stock was trading at $170 a share in early 2007. Now it is worth roughly $2 a share to JP Morgan (but only with the Fed backing $30 billion in questionable assets). Like Enron, you have to feel sorry for the working stiffs that had funded their 401K plans and added additional money to the ESOP progarm with additional shares of Bear Stearns stocks. And, like Enron, the fingers should be pointing to the top management - the folks with the million dollar a year salaries that were responsible for running the business. Oddly enough, when these businesses take on risk and make a profit...those profits are paid to the executives. But, when their risks go the other way, they expect the Federal Government (our tax dollars) to bail them out. I only wish Las Vegas worked that way for me. Nick Sredy Director http://www.creditmanagementworld.com

  • king - Tuesday, March 18, 2008, 9:03AM ET  Report Abuse

    • Overall: 2/5

    I usually like Ben's writing but I'm afriad the credit crisis have also claimed casualty on this once capitalist - government guranteeing private business to succeed?!!

  • Yahoo! Finance User - Tuesday, March 18, 2008, 8:31AM ET  Report Abuse

    • Overall: 1/5

    Just saw Ben on Pat Robertson. To my shock and disappointment he does not appear to believe in evolution. Can anyone that dumb in one area be trusted to give sage advice in another?

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