Ben Stein vrs Goldman

This is my first time blogging, mostly just to keep track of and record some of my thoughts and i guess allow them to be viewed by others. Hopefully the information will be interesting and useful for others… if not I guess it doesn’t matter much.I just read Ben Stein’s article in which he insinuates somewhat that Goldman Sach’s is opportunistic and unethical.                                                                                                                                                                                                                     Interestingly, he denounces one economists view that the housing market problems will leak over to the general credit markets and cause a large decrease in available funds for loaning. This article makes some good and bad points, but unfortunately the bad points seem to outnumber the good. First, he states that the Hatzuis is serving Goldman’s interests by writing a pessimistic version of the economy. Often, Stein uses “history” to validate that Hatzuis’s point of view is not warranted and is overly pessimistic. However, Stein seems to forget that using past historical situations is a poor way to gain confidence about future outcomes. Most of financial theory points out that using past information as a pure proxy for future outcomes is going to be highly inaccurate. Meanwhile, the housing market we face today is quite unique with housing prices having risen so substantially for so long, in many ways fed by poor lending practices. Hatzuis may draw some radical conclusions, but he is correct in assessing that the housing market will cause a general change in credit markets. It was only as little as a decade ago (with Long Term Capital Management) that the credit markets saw individual collapses in liquidity begin to bring down the market as a whole. While housing is a huge problem to the economy, the poor lending practices that occurred in the past credit bubble are the factors that will cause a general economic downturn unless many forces come together to stop this (which might not be the best solution). It is not just Hatzuis who predicts a very substantial risk for recession, but the Economist and many other sources speculate on this… all ideas are self-serving to some extent, it is important to realize this and then dismiss it since there is little way to disentangle yourself from your opinions and analysis. This has always been a critique of banking (part of the reason we separate the research and banking departments so that banks cannot do this), that banks publish self-serving research, but it really is up to the markets to decide who is right which is why their is an incentive to get it right as opposed to serve yourself…. you want credibility which means a lot in the financial markets.                                                                                                                                                                                                                                                                                                                      Along with this, Stein makes the contention that Goldman was a huge seller in CMOs, the same product that they were shorting, insinuating that they took advantage of other buyers in the market and were unethical. However, it would have been more detrimental to markets if Goldman had not taken part in this market because its personal opinion was that the products were lousy. The market for CMO is comprised of a few major sellers, and therefore the actions of an individual seller will have a huge effect on the market. If Goldman decided that CMO products were not the investment they wanted to make, it would be problematic if they decided to no longer provide this product for sale to the market if they were a large seller of the product. For example, I might be a major seller of corn, and am selling it at the price the market necessitates. At the same time, I could believe the value of corn is overpriced and therefore I short it on the market myself while still providing corn into the open market. If I was a major seller in corn (somewhat monopolistic) and I decided I should stop selling corn on the market, then I would unnaturally force the price of corn upwards. This would be more detrimental to the markets since I am using my limited information and limited point of view to cause a large change in the market as opposed to many individuals choosing the quantity and subsequently the price of corn. Even more so, perhaps I knew the corn I was selling might very well spoil quickly (this is only a might since no individuals knows with certainty the future), and I begin to short corn on the market as I believe the general quality of the product will decline (ignore the effect of the quantity shortage due to spoiled corn). It would not make sense for me to change my price in regards to market demand and cause inefficiencies. I do not believe it was wrong, unethical, or in any way bad that Goldman both sold CMOs and shorted them.