Ben Stein sat in on some cabinet meetings in 1974, and learned that high-ranking political officials aren’t always super-smart. This, he seems to think, was not a good thing. He then says that since even very smart people have been humbled by the current crisis, it’s foolish to place too much faith in any politicians, even ones as smart as those currently coming in to office.
Stein, the son of two extremely smart parents, has built an entire career out of being (perceived to be) smart, so it’s maybe not surprising that he considers the present crisis to have come about despite the best efforts of very smart people, rather than because of them. But leverage is an inherently and obviously dangerous thing, and invariably it was extremely smart people who managed to persuade themselves, counterintuitively, that it was something to be embraced and maximized.
A stupid fund manager would never buy a CDO, because there’s no remotely obvious way of working out how much it’s worth or what the default risks are. But smart fund managers, working with Monte Carlo simulations and copula models, were happy to rush in. There are a thousand other examples, but suffice to say that AIG Financial Products was predicated on the idea that it could monetize exceptional intelligence.
So when Stein tells us this week that smart people can make big mistakes, the only reasonable reaction is a "well, duh". Which doesn’t mean, of course, that Stein himself is excused from being incredibly stupid:
While some foresighted people had inklings of danger, the exact total magnitude of the liabilities associated with low-grade credit instruments was not known, as far as I am aware, to anyone…
Right now, I think it’s obvious that the next step for policy is the issuance of guarantees for banks that make loans.
Far from not being known by anyone, the total liabilities associated with "low-grade credit instruments" (by which I think Stein means subprime mortgages) were extremely well-known: all you needed to do to get the number was add up total subprime issuance — an exercise which many people engaged in, including Stein himself.
And I’m getting really annoyed with Stein inserting this Big Idea of his about loan guarantees into every column he writes, without ever bothering to explain what on earth he’s talking about. If he has a bright idea, he should tell us all what it is, rather than just waving vaguely in its direction on a regular basis. "For some reason," says Stein, "Mr. Bernanke and Mr. Paulson don’t see it" — maybe that’s because it doesn’t exist, except for in Stein’s fevered imagination.
Stein concludes with an imprecation to "put not your trust in princes", which would be reasonable enough if it weren’t for the fact that he’s spent the past year railing against princes (Hank Paulson, Ben Bernanke, Jan Hatzius, etc etc) whom, he reckons, have let him down.
Of course, there’s one person Stein doesn’t blame — the person who wrote this.
I’m writing this on Aug. 13, 2007… the stock market is cheap on a price-earnings basis, profits are fabulous… and in the long run, both here and abroad, stocks are a lovely place to be.