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Kass: Ben Stein Whistles Past Mortgage Mess

Doug Kass

From my perch, one of the most astonishing features of the recent decline in stocks and rise in credit spreads is the smug rejection of the notion that "things have changed" -- particularly of a credit nature.

No better view of the ostrich-in-the-sand mentality was delivered than by warm and cuddly actor/lawyer/columnist/comedian/economist/
Clear Eyes shill Ben Stein in this weekend's business section of the New York Times, and then again on CNBC Monday evening.

In the past, I have admired the common sense and logic of argument in Stein's writings. Maybe Stein was acting this week, as he did in the role of the economics teacher in the classic movie Ferris Bueller's Day Off. After all, on Sir Larry Kudlow's show, Stein suggested that the mortgage lenders will "end up fine," and he concluded that the subprime mess is a media hoax in an attempt to "talk America into a panic." Excuse me?

Tell that to Thornburg Mortgage (TMA Quote), which is temporarily ceasing loan production, Countrywide Financial(CFC Quote), American Home Mortgage, Accredited Home Lenders (LEND Quote) or the millions of individuals who are about to lose their homes and those that can no longer get a mortgage. Or tell it to the investors in the Bear Stearns (BSC Quote) hedge funds and the Sentinel Cash Management Fund.

Tell it to the homeowners who live next to foreclosed homes who are about to rein in their own spending for fear that they might be the next foreclosure. Or tell it to the Wal-Mart (WMT Quote) customers and mall customers who are no longer buying. Or tell it to the U.S. banks that are caught with hundreds of billions of dollars of illiquid bridge loans. Or tell it to the foreign banks that are taking multibillion-dollar writedowns and are reining in their credit activity. Or tell it to the employees at brokerage firms, banks and retailers who will soon be laid off.

The subprime market is not an isolated problem as suggested by Stein; it is only the beginning of the chain.

The global credit bubble of leveraged financial engineering (and ownership of risky assets) has been pierced. Wall Street sold arcane and illiquid products with promises of limited risk and fat profits. I have fully covered the causality and chain reaction of deteriorating subprime on the broader world credit markets on The Edge. Throughout my chronicles, bulls scoffed.

It is now clear, however, that our financial and investment world is so tightly wound and levered that the likely fallout is going to be far broader than almost anyone, except an outspoken minority, expects. What had been a liquidity problem is now morphing into a solvency problem in a wide and surprising array of assets and companies, including money market funds, Canadian trusts, cash management funds, mortgage companies, investment bankers, etc.

The price discovery in the credit markets will inevitably result in further wealth destruction, bankruptcies and an ever-increasing risk-aversion, regardless of central-bank behavior. The excessive use of cheap, mispriced credit is the source of the problem, and providing more liquidity (as central bankers do) can hardly be considered a healthy solution. Our financial system is like an alcoholic who has had too much to drink -- the solution is not to serve up another round of drinks but rather to close the bar.

Stein, like others, seems to endorse the ludicrous notion that there remains a negativity bubble. Many were wrong three months ago, and Stein is wrong today, as stocks and credit don't fall in the manner that they have in the past month if there is broad-based pessimism. Rather, with the benefit of hindsight, it is now clear that there was a bubble in optimism, as disbelief had been suspended on the part of buyers of credit, buyers of homes and buyers of stocks.

In his now-famous interview with Erin Burnett, Jim Cramer went on a rant in which he expressed his idea that certain members of the Fed didn't understand the severity of the current credit problem.

Jim Cramer knows how bad the situation is.

Ben, pardon my French (and my reference to Ferris Bueller's Cameron Frye), but on the subject of credit, you are clueless.

The credit event that you dismiss is already morphing into an economic event.