What is it with Ben Stein and his conspiracy theories? When he first started blaming Goldman Sachs traders for causing the market’s sell-off, it was easy to laugh at him. But he doesn’t seem to be letting go, and at this point I think maybe we should start being quite worried about him instead. At this point Stein is presenting himself as a cross between short-bashing Overstock CEO Patrick Byrne and Soros-bashing former Malaysian prime minister Mahathir Mohamad; if he goes much further, I fear he’ll start blaming the Rosicrucians, or maybe engrams. (He is a creature of Hollywood, after all.)
Stein uses his column this week to propound what he calls "financial realism," wherein market moves reflect decisions by human traders rather than "the real economic situation". Which is profoundly silly even by Ben Stein standards.
Of course prices are set by traders, that’s traders’ job. Some people think that if you get enough traders together, then the Invisible Hand or the Wisdom of Crowds or some other economic cliché will align market prices with economic realities. But what Stein fails to understand is that insofar as market prices are aligned with economic realities, that’s not because individual traders are trying to align prices with whatever their own idea of economic reality might be. It’s just that when you get a whole bunch of profit-oriented traders together in the same market at the same time, that’s what generally, over the long term, tends to happen.
Markets are an emergent system, like, say, an anthill. Any given ant has no particular intelligence, and moves around in a random fashion. But the anthill of which is it a part has a definable mind of its own. When Stein blames traders for the market’s fall, then, he’s blaming bad ants for the actions of the anthill. Which ascribes to them much more power than they actually have.
"The amount of money available to large professional traders is so large that they can overwhelm the market, at least for a while, anytime they want," says Stein. What he doesn’t say is that "a while", in this context, is normally measured in minutes, or perhaps hours – not in days and certainly not in weeks. If the broad stock market is down 14% from its highs, there’s simply no way that can be attributed to large professional traders overwhelming the market. As Stein himself points out, we’re talking about trillions of dollars in value here: even with leverage, no professional traders control anything like that much money.
And it would be nice if Stein would stop talking about those trillions as "losses," as if everybody bought all of their stocks right at the top of the market. Let’s say Andy has a painting for which Bill (but no one else) would be happy to pay $500. When Bill dies, has Andy just lost $500? Not at all. The market value of Andy’s assets might have gone down, since now there isn’t a buyer for Andy’s painting. But using the word "losses" is a bit extreme.
But Stein actually goes even further than that:
The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts — very roughly — a fall in corporate profits of roughly 14 percent.
It’s really hard to understand what Stein is driving at here. He clearly doesn’t believe in some strong version of the efficient markets hypothesis which says that expected corporate profts really have fallen by 14% since October. The implication seems to be that the efficient markets hypothesis held in October, and that the market was pricing in future profits correctly; and that it doesn’t hold today, in the wake of all that short-selling by those nasty traders.
On the other hand, there’s no reason why the efficient markets hypothesis shouldn’t be holding right now, and that the market was irrationally exuberant in October. Which is probably a more likely scenario, given the disconnect between stock prices and bond prices back then. And of course it’s always possible that the efficient markets hypothesis wasn’t holding then, isn’t holding now, and that markets are simply gyrating as markets will, with only a very loose connection to the real economy or corporate profits.
But really everything you needed to know about this column you got right at the very beginning:
LONG ago and far away, I was a student of law and of economics at Yale. The economics I found fairly easy…
Economics was not, is not, and never will be "fairly easy". If you think that economics is "fairly easy" you’re wrong, no matter how high the grades that your Yale professors give you. Stein, it would seem, learned one main thing at Yale: that when it comes to matters economic, you can be lazy and still get things right. Unfortunately, no one seemed to teach him that you can also be lazy and get things spectacularly wrong. Which is funny, considering that that’s what Stein teachers his readers every time he writes a column for the New York Times.