When the Sky Falls - Ben Stein in the NY Times

October 26, 2008
Everybody’s Business
You Don’t Always Know When the Sky Will Fall

By BEN STEIN
NOW, as the great Phil Rizzuto used to say, for “some high hops and short stops” — only not in sports, but in finance and life.

First, I get a certain amount of mail asking why I was unable to spot the stock market crash in advance, sell short and become rich. And why was I unable to foretell the future, so my readers could avoid losses and make money?

Well, I am just a person. I don’t have any magical powers to foresee the future. In this case, I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson Jr. to allow Lehman Brothers to fail. That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.

Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.

(By the way, it’s a disgrace that Mrs. Schwartz, a mainstay of economic insight since before World War II — as well as my late mother’s college roommate at Barnard — has not been a Nobel laureate. That hints at a dismal sexism in the dismal science.)

The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t.

After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn’t happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.

The failure of government to limit the loss possibilities from credit-default swaps has also been a mystery to me. And credit-default swaps themselves are something of a mystery. They are derivative instruments that supposedly insure a bond or similar entity against default. In fact, they are a wager about the possibility of default of anything, and the potential payouts for the wagers that have been made are many times larger than the value of all the subprime mortgage bonds that ever were.

The need for the government to take action seemed so clear — and still seems so clear that I cannot believe a day passes without its happening. But the days pass, nothing happens, and I am proved wrong again. And I lose some of my life savings and it hurts.

Now let me move to another point: all of the recent misery, including the stock market’s plunge, the disasters at Fannie Mae and Freddie Mac, the loss of retirement savings. These did not happen out of the blue. The catastrophe of giving bonds ratings far higher than they deserved did not happen by chance. And endlessly rosy reports from banks and investment banks about their health did not result from a butterfly flapping its wings in China.

Human beings did these things. The harm to the American people and to the world has been substantial. There has been real pain here. Why is it taking so long to find out who did what and whether laws were broken? That’s what prosecutors are for.

And, closer to home, a talented makeup artist who works with me almost daily in my TV appearances asked what happened to people in a recession. (She is young.) I said that fear and insomnia happened to most people but that a few million would actually lose their jobs and millions more would lose income.

“What do they do?” she asked, looking worried.

“They find other work or live off their savings,” I said. “They certainly cut back on their spending.”

“What if they don’t have any savings?” she asked. “I don’t have any savings,” she said. “No one I know except you has any savings.” She looked extremely worried.

This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.

FINALLY, I’ll turn to the oil companies. When crude was skyrocketing, the beautiful people wanted to beat Exxon Mobil, Chevron and BP into a pulp. Many people assumed that oil barons controlled prices, made “obscene” profits and made life difficult for ordinary citizens. But the price of oil has fallen by more than half from just a few months ago. Gasoline prices are at levels no one thought we would ever see again. Very expensive projects that the oil companies commenced, like extracting oil from tar sands in Canada, may now be major money losers.

What do you say, folks? Let’s acknowledge that we were a bit hasty. The oil companies are just corks bobbing up and down on the ocean of worldwide demand and supply, exactly as the oil companies said they were. They are not going to be starving, but they are clearly not the invincible demons that their enemies said they were. Now that we see how vulnerable they are, is there any reason to hit them with a surtax?

Will we ever learn that they are just dust in the wind, like the rest of us? Probably not.

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.