Now that I’ve left the desert and I have proper internet access rather than trying to update the blog from my iPhone, I can finally get around to Ben Stein’s NYT column from Sunday. Given that I’m still on holiday, though, I’ll allow myself a slightly broader remit this time round. I’ll explain just how Stein is wrong, as usual. But I also want to ponder Stein’s bigger shtick, as well as my own.
Stein has two main points in this column. The first is merely wrong: he says that as far as we know "we are not in a recession," and that "as a matter of definition, we simply cannot be in one yet". This is simply false. Stein is correct that a recession is defined as two consecutive quarters of negative growth, and that growth in the fourth quarter was positive. But that doesn’t mean we can’t be in a recession now: we’re in the first quarter, and if both Q1 and Q2 growth are negative, then the recession will have started in Q1. Alternatively, if Q4 growth is revised downwards into negative territory, then a recession could have started as early as Q4. We don’t know for sure, but it just makes no logical sense to move from "we don’t know whether X" to "therefore not X". (Would that Stein felt the same way about the existence of God: he might not have made the world suffer through his latest film.)
Stein’s second point is more insidious. It, too, is wrong: he complains, essentially, about some shadowy cabal of investment bankers and hedge-fund managers who between them control so much money that they can move the market and bring down entire financial institutions on little more than a whim. Why is the market melting down now? He’s willing to go out on a limb:
The new part is the hedge funds and the changing of Wall Street from a financing entity to a market manipulation entity. The new part is hedge funds with (supposedly) $1.5 trillion in capital, immense hedge funds within banks and investment banks. The new part is that they have so much money and so much selling power that they can do what capitalists really want and love to do: to make money not by betting on the markets, but by controlling the markets, by putting so much sell side (and occasionally buy side) firepower in play that they know they will move the markets. This takes all that annoying uncertainty out of it.
The task of the hedge funds is to find a weak spot in the market, and to put so much pressure on it that they can move it down, scare other players into selling (with the endless help of guileless journalists), wreak havoc with the markets’ indexes and then create that much more selling. Once the process starts rolling, it’s shooting fish in a barrel.
Just think of what the short sellers did to Bear Stearns.
Stein has been here before, but back then he was a bit vaguer. Now he’s blaming the demise of Bear Stearns on "short sellers", which is just ridiculous. There was a run on the bank, and yes hedge funds were involved. But the number of short sellers was tiny: if a bank suffers a run, you don’t need short sellers for the stock to collapse.
Stein simply refuses to believe that anybody is really worried; refuses to countenance that the fears in the market are genuine as opposed to manufactured by secretive billionaires for the purpose of their further enrichment. At least he’s consistent. His new film is premised largely on a repudiation of Occam’s Razor: the basic verities of Darwinism must, he thinks, be treated equally with any unfalsifiable crackpot theory which necessitates all manner of imaginable-yet-unobserved intervention by an entity of inhuman power.
When it comes to the collapse of Bear Stearns, Stein does something almost identical. The obvious and true narrative is one of fear: if a brokerage is looking after your assets, and there’s some small chance that the brokerage in question is going to go bust, then it’s perfectly rational to move those assets elsewhere. If everybody does that at once, the brokerage will go bust.
The problem for Stein is that in a fear narrative there’s no one really to blame. Stein feels the need to point fingers, and in return that means he needs a greed narrative instead. And there’s only one way to construct a greed narrative out of falling markets: short sellers! Never mind that the main role of secretive billionaires in this story was to lose money (Joe Lewis): Stein’s convinced that there are some other even more secretive billionaires, with even more money, who were shorting Bear’s stock and making a fortune. And the great thing about this theory – just like any conspiracy theory, and just like Intelligent Design – is that it’s impossible to disprove.
But the unfalsifiability of conspiracy theories is always just a means to an end – the end being the uncovering of said conspiracy, which is one in which a small group of powerful men stays rich and powerful, even if that means destroying the hopes and dreams of ordinary people. In other words, conspiracy theories are by their very nature populist: they thrive on blaming powerful others for the real or imagined travails affecting the masses. In that sense they’re a repudiation of the meritocratic American Dream. You thought you believed in science, or in fair and efficient markets? More fool you for being hoodwinked!
And it’s largely for that reason that I believe Stein has no place in the august pages of the New York Times. It’s not only that he’s wrong; it’s also that he’s anti-enlightenment, in a publication whose first purpose is to bring truth to its readers. Stein’s bit about the "guileless journalists" is a regular feature of his column: he uses his NYT real estate regularly to paint the NYT itself, along with other media outlets, as being but a pawn of the powerful. And again he does so not in any falsifiable way: he’s much happier using insinuation and innuendo to tap into the inchoate fears of the poor that they’re being taken advantage of. And that’s something which really doesn’t belong in the business section of a paper desperately trying to be taken seriously by financial professionals.
Which brings me to my last post – the one from the iPhone. Last week, I posted a blog entry with the headline "Why It’s Safe to Bet Against Joe Lewis", in which I said that it was a good idea to bet that Bear Stearns stock was going to fall. I concluded:
I see only one conceivable way in which Bear gets taken over for much more than $2 a share (or a bit more than that now, as the offer is in stock, and JP Morgan’s stock has risen since the offer was made). And that’s if Jamie Dimon unilaterally decides to raise his offer, deciding that spending a couple of hundred million dollars more on the acquisition is worth it if it avoids months of legal headaches. And Dimon’s said quite explicitly that he won’t do that. In this deal, Dimon’s the winner, and Lewis is the loser. If you want to bet on the loser, feel free. But don’t expect to make any money doing so.
As we all know, the following weekend Jamie Dimon decided to unilaterally raise his offer, and I put up a short and mildly snarky iPhone post saying that I regretted the error. But in truth I don’t regret anything. I’m a blogger, not a hedge-fund manager or the editor of an investment newsletter. I make no bets in the markets, and I lay no claim to "alpha". All I do is call things as I see them. If that’s valuable to you, great. But one thing I’m quite proud of is that sometimes I’m going to be right and sometimes I’m going to be wrong, and most of the time it’s going to be very easy to tell the difference. I’ve been wrong about many things in the past; hell, in the MBS market alone I’ve been wrong many times over. When I’m wrong, I try to learn from my mistakes, and you can’t do that without admitting your mistakes in the first place.
Every so often I get comments on this blog saying that I’m an idiot because something I said has turned out to be wrong. But that just doesn’t make sense to me. The real idiots, to me, are people like Ben Stein. Stein makes factual errors, but that doesn’t make him an idiot. What makes him an idiot is his evident belief in his own infallibility, to the point at which he clearly doesn’t allow the NYT’s editors to do even a cursory fact-checking run over his copy before it’s published. And what makes him more of an idiot is his steadfast refusal to engage with his critics – indeed, he will even stoop to outright deception in order to avoid having any kind of real debate.
Maybe the reason I feel so strongly about Stein is that we are both, in our own ways, opinion journalists. Stein is of the "here’s my opinion" school; I, on the other hand, thrive on debate. Every day I link to something I disagree with, and tease out exactly where the areas of disagreement are and why I think the other person is wrong. The end result, for the reader, is something much richer and more nuanced, especially when all the people I’m linking to are busy linking away themselves.
With surprising frequency, differences in the blogosphere end up being settled by events. On the question of Wall Street bonuses I was right and Jesse Eisinger was wrong; on the question of the Bear Stearns share price I was wrong and Jim Ledbetter was right. In both cases, the debate itself was illuminating. The problem with Ben Stein is that he doesn’t listen, he doesn’t debate; instead, he simply panders. It’s an attitude which might go down well among fundamentalist Christians, but it’s not one which belongs in the New York Times.
