Ben Stein on the economy and the mortgage mess

I'm not particularly a fan of Ben Stein, but his article in The New York Times entitled "The Gloomsayers Should Look Up" seemed to agree with a lot of my views of the current economic and financial situation. He tells us that:

The economy is basically in fine shape. Not perfect, but darned good. Almost all mortgages are not in default. Almost all workers in the labor force who care to work are not unemployed. The largest percentage ever of American household units, what were called "families" in the old days, own their own homes.

The stock market, in both absolute terms (the number on the Dow) and relative terms (the relationship of price to earnings), reflects optimism and an extraordinary, robust level of profits.

On a more sophisticated note of analysis, the spread between the interest rate paid on risk-free Treasury issues and on the Merrill Lynch master junk-bond index is far, far less than it was in the dark days of the tech meltdown from 2000 to 2002. (This data comes from Marty Fridson of FridsonVision, le dernier cri when it comes to junk.) This is a sign of less than horrific fear about high-risk debt.

Newspapers (which often sell on fear, not on fact) talk frequently about a mortgage freeze. However, for all but the least qualified buyers, mortgage money is plentiful, and in fact the potential borrower is bombarded with offers. Hotels and airplanes are full. Casinos in Las Vegas are jam-packed. There is still a long waiting list for Bentleys in Beverly Hills.

This country does not look like a country in economic trouble. Nevertheless, some extremely worrisome things have happened and are now being revealed, and worse are to come.

He then descends into a riff about the mortgage mess, most but not all of which I agree with. He says:

... I could easily be wrong, but I suspect that at the end of the day, you and I will be bailing out the hundred-million-a-year finance titans who messed this up in the first place... And we stockholders and taxpayers foot the bill, of course. But even this is not the worst part: there are still lots of people who can say with a straight face that the world of finance is overregulated, that we should trust the power players to do the right thing, that if we put finance under a microscope, or allow financial miscreants to be sued for misconduct, America will be harmed. There are still people, and I know many of them well, who believe that old myth that you can trust the markets to fix everything — that old magical thinking that some thieves will stop other thieves from robbing the sheep like us. That's the really sad part. Some babies never learn.

Actually I do disagree with that. In truth, the taxpayers are more likely to profit from a government bailout (ala Chrysler) since the problem is not the assets themselves, but the fact that he assets are heavily undervalued due to uncertainty about their risk. If the government were to buy out all of the "bad" mortgages and simply convert them to cheap fixed-rate mortgages the foreclosure problem would completely vanish in an instant with a stroke of a pen. The whole point of the non-government bailout is that the terms of the assets could remain intact and extremely profitable for the banks. I actually do trust the markets to fix this mess and it will only get worse if in fact the government steps in to "fix" it since a fix would not correct the behavior that led to the problems in the first place. Eventually, the banks will wise up and start converting the bulk of the problem mortgages to terms which will be both profitable for the banks and at least marginally bearable by homeowners. The whole point of the bailout in the near-term is to compensate for a lack of liquidity that is interfering with market pricing of the securities while we wait for them to be restructured so that their risk is reduced and made transparent.

-- Jack Krupansky