Ben Stein Watch: December 2, 2007

Ben Stein pops up in a lot of places: Yahoo

columns, Fortune

videos, scientifically-illiterate

movies, brain-dead

TV shows, even Portfolio

features. One place he doesn’t seem to have much presence, however, is the

UK. Which is just as well, because if he wrote anything like this

week’s NYT column in for a UK newspaper, he’d be risking a massive libel


Stein says that Goldman Sachs’s chief US economist writes research notes which

are "mostly about selling fear" and which are "a device to help

along the goal of success at bearish trades". He says that Goldman was

shorting its own CMO issues, and that it has "the culture of the KGB".

And he concludes:

Doesn’t this bear some slight resemblance to Merrill selling tech stocks

during the bubble while its analyst Henry Blodget was reportedly telling his

friends what garbage they were? How different would it be from selling short

the junky stock that your firm is underwriting? And if a top economist at

Goldman Sachs was saying housing was in trouble, why did Goldman continue

to underwrite junk mortgage issues into the market?

HERE is a query, as we used to say in law school: Should Henry M. Paulson

Jr., who formerly ran a firm that engaged in this kind of conduct, be serving

as Treasury secretary? Should there not be some inquiry into what the invisible

government of Goldman (and the rest of Wall Street) did to create this disaster,

which has caught up with some Wall Street firms but not the nimble Goldman?

The invisible government of Goldman? Do you think they have a secret

handshake, too?

Stein, in this column, is accusing the honest and blameless Goldman economist

Jan Hatzius of much more than mere intellectual dishonesty: he’s saying that

Goldman and Hatzius are using economic research notes to drive down the bond

market and make profits on the firm’s bearish trades. He compares their conduct

to that of Henry Blodget, who was charged

with securities fraud and is now banned from the securities industry for

life. And he says that anyone who used to run such a shop should never have

been considered for the job of Treasury secretary.

It’s not illegal – in this country – for Stein to make such allegations.

But it is quite shocking, and depressing, that the Gray Lady would willingly

allow herself to be used as a vehicle for this kind of yellow journalism –

and would place it on the front page of its business section, no less.

Do I have to slowly explain why Stein’s column is in fact unmitigated garbage?

Thankfully, I don’t, because Dean

Baker and Yves

Smith have got there before me. In a nutshell: Goldman sold the CMO that

Stein complains about in mid-2006; it made its big profit on subprime shorts

a full year later. Stein’s ridiculous assertion that a credit crunch and growth

slowdown "has not happened on any scale in the postwar world" can

be refuted with one word: Japan. And as for Stein’s statement that a correspondent

of his in Florida "may be right, but he’s not", I’m sure that

that will turn out to be false as well, the minute that anybody can work out

what on earth it’s supposed to mean.

More generally, macroeconomic research notes do not move markets. And a mortgage-bond

origination team is hardly likely to disband and retire for a life of sheep

farming just because an economist employed by the same organization is bearish

on the housing market. Is that really what Stein would have had them do? By

all means criticize Goldman for underwriting nuclear waste, as Allan

Sloan did – that’s fine. But there’s an oceanic gulf between that

and securities fraud.

Update: Stein’s NYT stablemate, Paul Krugman, weighs


Maybe I don’t have what it takes to be a serious columnist. I mean,

it would never have occurred to me to suggest that the only way to explain

an economic forecast I don’t agree with is to say that it must be part

of an evil plot to drive down the market, so that Goldman Sachs can make money

off its short position — and to suggest that Goldman should be the subject

of a federal investigation.

Update 2: Ehrenberg

weighs in too, and athenian_abroad

notes that Stein seems to think a bank’s reserves are the same as its capital.

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