chakravyuha

Ben Stein will be recognizable to most as the monotonic, hilariously laconic psychiatrist from The Mask. He’s also a recognized economist probably making him a unique species – an economist actor. He spoke at the Commonwealth club on the 24th of January 08 and here’s a summary of the facts he presented and his arguments and opinions. The emphasis in places is mine.

• It’s very very hard to forecast the market. The only way to correctly forecast is to forecast often! (pun intended by him). The markets are way oversold and there’s no justification for a drop of this magnitude. The only way to square off this drop is with a 20% drops in profits for 25 years consistently. Which clearly not happened in the near past.

• The economy is nowhere near as bad as it looks. The losses in the sub prime mess are about 100 billion so far. Even if the losses were double of that, it’s still a tiny fraction of what was lost in the tech collapse of the 90′s. Another way to put it in perspective is to consider the losses as a fraction of the entire size of the US economy, which is an aggregate of 65 trillion. Yet another way to put it in perspective is to consider that the entire mortgage market is about 20 trillion. If you put 100 billion alongside 20 trillion the picture does not look that distorted. On a lighter note he said that maybe we do not consider these as losses at all. It’s just a lot of people who borrowed money that they did not have in the first place and the now they do not have to pay it back!

• The US is probably not in a recession. Recession is defined as 6 months of continuous declining economic activity. We cannot know if we were in a recession since it’s only been a few weeks since the start of things going south. He thinks that even if what’s happening currently can be considered as a recession, it need not have happened in the first place. The average duration for a recession in the post war period has been 10 months. The average period in the past 25 years has 6 months and there have been only been 2 of them. Clearly those were bad but even those periods were not the end of the world.

Here, he brings up the role of the media. One of things that he mentioned more than once in his discussion was his displeasure with how the new media peddles bad news, hypes it and sells it, creating more fear and further bad news to sell. The media profits from peddling fear and uncertainty. The media put the fear in and fear affects the velocity of money and every part of the economic eco-system and that’s part of the reason of the current economic climate, not any real underlying problem.

• The Fed is actually doing a good job. The fed can supply liquidity into the market and he feels that the Fed can indeed go one step further and openly assure the banks that they have their banks. He thinks that the banks, in the way they are structured, are already pretty socialized so an open assurance by the Fed would not be too much out of line. He also suggests that maybe the Fed should bail out the mortgage industry too.

The Fed’s 150 billion stimulus helps with the mood. The the interest rate cut along with the stimulus handouts does not do much because there’s already a great deal liquidity in the market, but it does make the people feel that there is someone on their side and hence lift the general sentiment.

• Ben Stein spoke out strongly against the financial sector. He considered the role of the traders, speculators and short sellers highly avaricious and irresponsible. These people have enormous power because they are literally controlling the flow of money and the rices on securities by controlling trading on the options/futures/stock exchanges in tremendous volumes. These people are pushing push the market up or down depending on which direction they think they can make more money, moving the market up buy buying up or moving the down by selling.

• He talks about Goldman Sachs reported as having simultaneously selling mortgage backed securities and at the same time doing short sales on that sector. Not illegal but probably unethical and definitely cynical (read more about this here and a defense of what Goldman did here). People running these companies did not understand the risks properly and were also culpable. He goes on to talk against fat CEO exit options and compensation packages even in the face of poor performance. Case in point, the former chairman of Merill Llynch (Stanley O’Nea) who oversaw losses in billion during 2007 on his watch, but still got a sweet $160 million in compensation ($24.7 million in retirement benefits, $5.4 in deferred compensation, and $131.4 million in stock and option holdings)!

• Oil prices are a concern but it’s nothing catastrophic. Oil prices cannot be controlled by Washington so why not let the market handle it. I guess the rationale is that the prices might go higher but then market economics will have people buying less of the scarce (and consequently higher priced) commodity or maybe seek alternatives and the prices would even themselves out (in the worst case we all end up driving horses to work).

• On a non-economic note, he mentioned being very proud of the progress made in moral and ethical sphere by the US. He considers the fact that in a country this size everybody has legal rights and freedoms and despite it’s size the country is very well governed (I totally concur with him on this). He mentioned the Civil Rights movement as being pivotal in shaping the morals of the nation.

Among the immediate challenges facing the US:

• 7-8 million baby-boomers are nearing retirement. Their average savings are $15,000. If you include home equity, assuming all have a home, it’s about $115,000. These are hard figures to make a decent living on, especially for people in their old age who might have more pressing medical needs. Among these ~8 million, 40% have no real savings. Ben then encourages people who make savings instruments to design ones that are specially targeted to the boomers and asks the baby-boomers to think more on saving.

• Medicare. The indebtedness is so large that it exceeds the entire income of the US. If you put the entire economy of the United States, every car, every silo, everything that’s produced, every stock, every bond, everything into one big bond, even that does not produce enough income to pay for the Medicare liabilities.

• The US is borrowing somewhere in the vicinity of 1 billion dollars a day for oil. That’s a a LOT of borrowing and because of this the foreigners are owning a lot of the US. At a certain point they can just up and leave and decide against holding dollars anymore. They might think the the dollar is constantly going down and might decide to hold Euros instead. This in turn might cause the dollar to sink even more and could form a vicious circle. What’s the entire set of reasons for the dollar depreciating is something I do not understand very well and will explore a little more in another post.

• The United State is a fantastically prosperous. The average real wages (after inflation) have tripled in the last 50 years. On a per capita basis, the US is way richer than Japan and much much richer than Saudi Arabia or Kuwait. That said, there is great income inequality and wealth is very evenly distributed and that’s a cause for concern but it’s potential for great social friction. He cites the statistics of 1/10th of 1% owning 43% of all the financial assets in the country and the bottom 20% owning a paltry 1% (and most of that too in the form of cars).

In 2004 the top 130 thousand wage earners in this country earned more than the bottom 120 million. In 2005 the top 300 thousand wage earners in this country earned more than the bottom bottom 200 million. Ben Stein sees this disparity as a large force undermining social cohesion, something on which he lays a big emphasis on as being one of the core values and strengths of the nation.

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