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Market Overreacting to Subprime Loan Losses, Ben Stein Says
Putting recent turmoil in the stock and bond markets into perspective, writer, economist and entertainer Ben Stein indicated in the Aug. 12 New York Times and in an Aug. 19 appearance on CBS Sunday Morning that the economy remains strong and that recent events in the financial markets both at home and abroad have been driven by irrational fears.
Wherever the bottom of the current shakeout in subprime lending may be, “I do know that the market reactions are wildly out of proportion to the real problems that have been revealed,” Stein wrote in the editorial pages of the Times.
Stein calculates that losses in the subprime market, based on a 5% foreclosure rate, amount to about $33 billion to $34 billion. Even if foreclosures doubled to $67 billion, “a large sum by absolute standards,” Stein says that it is relatively small measured against the $10.4 trillion size of the nation’s mortgage market, the $70 trillion total wealth of the United States and the $15 to $20 trillion value of stocks listed in the U.S.
“Much more to the point,” he writes, “the fears and terrors about subprime mortgages have helped knock off 6.7% of the stock market’s value in recent weeks. This amounts to about $1.1 trillion, or more than 30 times the losses so far in the subprime market. In other words, these subprime losses are wildly out of all proportion to the likely damage to the economy from the subprime problems.”
He adds that even though the Dow Jones industrial average has suffered over fears about the subprime market, most of the Dow 30 are unaffected by subprime mortgages in any meaningful way, no Dow company is short of liquidity and consumer spending has remained strong.
On CBS, Stein said that the financial markets are not “granite slabs” and it’s normal for them to move around and it’s not the end of the world if they do decline for awhile.
Stein also reminded viewers that borrowers of subprime mortgages are more likely to default than prime borrowers, but they have not been defaulting in huge numbers, they comprise a tiny portion of the nation’s credit markets and the losses have been small when stacked up against the total wealth of the nation.
Stein — who was a speech writer for Richard Nixon and Gerald Ford; was the host of the Comedy Central quiz show, “Win Ben Stein’s Money;” and who makes regular appearances on the Fox News Channel to talk about finance — said that today’s financial turmoil will eventually pass, and his advice is to remain calm and exercise patience.
To see a video of Ben Stein on CBS, click here. This link was available when this issue of Nation's Building News was published, but can be discontinued at any time.
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