Here’s a quick pop quiz for you, to see how well you understand the credit crisis. There’s only one question:
What makes a bank insolvent?
(a) When it doesn’t have enough money to pay all its obligations, because the loans it made fell in value.
(b) When it builds up ample reserves but dares not lend them out.
(c) When it fails to dissolve upon being dunked into a bath of liquidity.
If you answered (b), then congratulations: you’re Ben Stein! Here he is this week:
Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.
Anna Schwartz, of course, knows exactly what insolvency is. Stein, on the other hand, first tells us that any bank which couldn’t meet its obligations if its loans went bad — which, of course, is all banks — is insolvent. And he then says that a solvency crisis is what you get when banks dare not lend.
There is absolutely zero justification for the NYT printing this claptrap. The name of Stein’s column is "Everybody’s Business": it’s meant to be something a general reader, without specialized financial knowledge, can understand and learn from. So when he gets basic concepts like solvency utterly wrong, he’s causing very real damage. And of course at a stroke he renders pointless much of the rest of his column: one can do no better than hazard a wild guess at what he thinks he’s talking about when Stein says that he wanted the government to "issue blanket solvency guarantees to banks".
One of Stein’s most annoying rhetorical tics is to give the impression that he’s thought about something long and hard, and that he’s doing us all a favor by just presenting his thought-through conclusions rather than actually working through any kind of argument. There’s a prime example this week:
The failure of government to limit the loss possibilities from credit-default swaps has also been a mystery to me.
Anybody who knows anything about credit default swaps, or who read Stein’s Yahoo column on the subject, knows this lies somewhere between meaningless and idiotic. But Stein isn’t writing for readers who know what credit default swaps are: he’s writing for readers who don’t know what credit default swaps are, and who think that he does know. And so thousands of people now think there’s some simple solution to the credit crisis which the government is willfully ignoring, with the result that stocks fall and it’s all Hank Paulson’s fault.
Indeed, Stein goes on to say that "all of the recent misery, including the stock market’s plunge" was caused by people who should face criminal prosecution. It’s a wonderfully deluded view of the world: if you buy stocks and they go up, then you’re clever and admirable, while if you buy stocks and they go down, that’s clearly the fault of nefarious criminals.
Stein’s also more than a little disingenuous here:
I get a certain amount of mail asking why I was unable to spot the stock market crash in advance, sell short and become rich. And why was I unable to foretell the future, so my readers could avoid losses and make money?
Well, I am just a person. I don’t have any magical powers to foresee the future.
This sounds perfectly reasonable until you remember that Stein’s the person who wrote an entire book entitled "Yes, You Can Time the Market!".
Stein uses this week’s column to exhort his readers to "start saving right now, and don’t stop until you die" — I guess that means they should never retire. But he is absolutely to blame for doing his very best to elide the distinction between saving and investing, by doing things like referring to his stock-market investments as his "life savings". If you bet your money, you’re not saving it — and investing in the stock market is always a bet, even when it has a greater-than-even chance of paying off.
Stein ends with a very peculiar argument against windfall taxes on oil companies:
When crude was skyrocketing, the beautiful people wanted to beat Exxon Mobil, Chevron and BP into a pulp. Many people assumed that oil barons controlled prices, made “obscene” profits and made life difficult for ordinary citizens. But the price of oil has fallen by more than half from just a few months ago…
The oil companies are just corks bobbing up and down on the ocean of worldwide demand and supply, exactly as the oil companies said they were. They are not going to be starving, but they are clearly not the invincible demons that their enemies said they were. Now that we see how vulnerable they are, is there any reason to hit them with a surtax?
As is his wont, Stein gets the argument for a windfall tax exactly backwards. The whole point of a windfall tax is that oil-company profits weren’t the result of any particular skill or good management on the part of the companies themselves, and that they were simply windfalls which resulted from a high oil price. The argument had nothing to do with the companies being invincible demons who controlled prices — quite the opposite.
And I’m afraid I don’t see how vulnerable the oil companies are — not at all. A one-time windfall tax on the profits they made when oil was over $100 a barrel wouldn’t change the economics of the oil industry at all. And since tax revenues are going to plunge as the recession bites, it makes sense for the government to raise money where doing so does the least harm. An oil-company windfall tax would do less harm than a lot of other taxes which are being levied right now. I’m not saying I think it’s a great idea, necessarily. But Stein’s argument against it is just silly.