Crisis Council From Ben Stein – Good Stuff!

Fortune, one of my most favorite magazines, has dedicated their latest issue to the topic of risk. One of the cool features of this particular issue is their nine-page section called “Wall Street Voices – Crisis Council,” which are the opinions of some of the bigwigs on Wall Street (and Omaha, NE) regarding the subprime mess.

The one opinion that I particularly enjoyed was that of Ben Stein. I love the opening to his piece:

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

I love it! Here’s Ben’s thoughts on the subprime market:

For example, right now we are stewing over what everyone calls “the subprime mess” and going crazy, mourning all day and into the night–falling over ourselves to get all of the misery right, to paraphrase Evita. I’m writing this on Aug. 13, 2007, and in the past four or five weeks, the markets of the U.S. have lost some 7% of their value, or about $1 trillion.

But read on: The subprime mortgage world is about 15% of all mortgages, or $1.5 trillion worth, very roughly. About 10%–approximately $150 billion–is in arrears. Of that, something like half is in default and will likely be seized in foreclosure and sold. That comes to about $75 billion. Roughly half to two-thirds of that will be realized on liquidation, leaving a loss of maybe $37 billion. Not chump change by any means–but one-thirtieth, more or less, of what has been knocked off the stock market.

The piece then goes on to compare and contrast stupid investors with “smart” investors. It’s a must read for anyone who wants a bit of sanity added to the mixture. The reest of the opinions are interesting too but Ben’s was my favorite. Read them when you get a chance and then come back here and tell us your thoughts.

4 thoughts on “Crisis Council From Ben Stein – Good Stuff!”

  1. I didn’t read the article yet, but here’s the problem with Ben Stein’s thinking. It is not just the losses on those foreclosed houses that we need to worry about. Many mortgage originators have suffered from this whole mess and have folded. That translates into job loses, those job losses translate into decreased spending in the economy as a whole. Poor lending practices are being corrected which means mortgages and HELOC’s are harder to come buy, meaning decreased borrowing and decreased spending. Decreased spending means fewer new jobs or even a contraction. And let’s not forget about leverage. Hedge funds have levereged everything in order to produce huge gains with minimal investment, but the sword cuts both ways and you get what is unfolding now, enourmous losses on what Ben Stein considers a small piece of the pie. It’s all connected. If the mortgage industry was in a bubble separated from the rest of the economy, perhaps Ben Stein would be correct. But it’s not, and he’s not. Easy credit caused the Great Depression and it will cause the next one too.

  2. In addition to what Easy E says, I think that with the inevitable tightening of the lending practices, and fewer people qualifying for home mortgages, there may be another ripple through the homebuilder and construction areas. The effects might not be huge, and I agree with Ben’s analysis that the sub-prime mess may be a little overblown, but there is no telling yet how much of an impact this will have on the rest of the economy. It will be more telling when the ARM rates are reset here in the near future.

  3. I think Ben is right on. Sure their will be job losses but there will be gains too. Instead of carpenters doing new-con they will be doing home repairs; and at reasonable rates again. Instead of mortgage brokers making loans they will be consulting people about debt. Overblown.

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