I think it’s fair to say that Ben Stein has officially capitulated. In his panicked and unhelpful column this week he says that the economy is "shot through and through with fear, even terror", and that things could get much worse:
If a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.
Ben, let me explain to you what deleveraging is. When you borrow at a low rate to lend at a higher rate, you’re leveraged. Traditionally, banks do that by borrowing short (through taking in deposits) and lending long, making their money from a positively-sloping yield curve. More recently, they tried other ways of doing much the same thing, setting up off-balance-sheet investment vehicles which had triple-A ratings and could therefore borrow at very low rates while lending to riskier credits in sectors such as subprime mortgages.
In a deleveraging, those trades are unwound. The riskier, higher-yielding assets are sold, and your own excessive borrowings are paid down. If the assets have fallen substantially in value, the deleveraging can be associated with large losses.
As a result, the one asset class which is absolutely safe from global deleveraging is the Treasury market. No one ever borrowed at low rates to invest in Treasuries, because Treasuries are always the lowest-yielding bonds in the world. No one can borrow cheaper than the US government.
Now it’s possible that foreigners will sell their Treasury bonds for dollars, convert those dollars back into their domestic currency, and start spending at home. That would help to stimulate the global economy, and it might weaken the dollar. A weaker dollar, right now, would be a good thing: it would help US exporters, and no one’s worried about inflation, which often accompanies currency weakness. So I don’t understand why Stein is so worried about foreigners selling Treasuries.
But he’s soon onto other subjects: for instance he calls, again, for "solvency guarantees for banks", without even hinting as to what on earth he might be talking about. How can the government guarantee that banks are solvent? If there’s an insolvent bank, what would Stein have the government do? Lending money to the bank at low rates wouldn’t help, since that would only increase the bank’s liabilities. The government could buy a large chunk of equity, but that’s not a "solvency guarantee", that’s nationalization.
Stein then forgets his worries about the Treasury market, and decides that the government should simply issue enormous amounts of new debt:
There is virtually no dose of stimulus that is too much in an economy as shellshocked as today’s.
Well, if you stimulate the economy so much that US debt is no longer risk-free, that’s the one course of action which is most likely to result in foreigners selling their Treasuries, and interest rates going up rather than down. And of course Stein knows what happens when rates go up: "a typical recession," he says in one of his trademark highly-contentious oversimplifications, "is brought on by Federal Reserve tightening". If rising interest rates coming from the Fed slow down the economy, why shouldn’t rising interest rates caused by the Treasury do the same thing?
Stein also urges a Detroit bailout, while adding that "I understand well the arguments against rescuing Detroit, as I have often said." Er no, Ben, you haven’t said anything against rescuing Detroit. To the contrary, you’ve said that "the national security considerations make saving General Motors, Ford and Chrysler a life-or-death matter". Today, for good measure, you add this, on the subject of a possible bankruptcy:
It would kick the economy to the curb, increase the dose of fear running through the nation’s bloodstream, frighten consumers from buying, choke lending, and tend to keep the economy from returning to full employment.
Wow, bankruptcy is truly a monster of horrific proportions. It kicks, near curbs! It doses bloodstreams with fear! It frightens! It chokes! Are we in need of a bailout, here, or a superhero? No, what we need is something stronger still:
A stimulus package that is big enough and long-lasting enough to do the job, perhaps with Treasury rebates for buying cars, trucks, refrigerators and toasters.
I swear I’m not making this up. The NYT is seriously giving Ben Stein precious space to advocate a government rebate for buying toasters. Let’s just hope they’re not the Chinese-made GE toasters which were recalled recently by Wal-Mart.