Kass: Ben Stein, Back Off Goldman Sachs

In Sunday's column, the author made a number of allegations that "all started percolating in my fevered brain last week when a frequent correspondent, a gent in Florida who is sure economic disaster lies ahead (and he may be right, but he's not), forwarded a newsletter from a highly placed economist at Goldman Sachs named Jan Hatzius."

Being the "gent" in question, and thus feeling somewhat responsible, I feel it is my duty to defend Goldman, Hatzius and common sense:

Ben Stein criticized Hatzius ("not a serious overview of the situation") for a "combination of theory, data, guesswork, extrapolation and what he recalls as history to reach the point that when highly leveraged institutions like banks lost money on subprime, they would cut back on lending to keep their capital ratios sound -- and this would slow the economy."

Stein specifically questioned Hatzius' hypothesis that home prices would fall an average of 15% nationwide and that, as a byproduct, financial institutions would be reticent to lend. He concluded that the economist was selling fear, a consistent theme of Stein's over the year of articles in The New York Times.

My response: I read the object of Ben Stein's scorn three times over the last week -- Hatzius' Global Economics Paper No. 162, Nov. 27, 2007. The conclusions in his exhaustive 30-page report were well-documented, based on historical evidence and Federal Reserve reports and analysis, noninflammatory, and were supported by 19 exhibits -- as well as academic studies and regression models.

At the core of the entire article is that Ben Stein still believes in Goldilocks -- that all is well in the U.S. economy, the credit markets are sublime (not subslime) and that those who disagree with him are fanning fears of panic. In contrast to Hatzius' well-researched tome, Ben Stein's responses seem to be from the gut and undocumented.

Unlike Hatzius, he offers no statistical evidence in support of his views, which are as hazy as his continued contention that the mortgage problem is contained and ring-fenced -- a view that is in sharp contrast to even what the Federal Reserve's Kohn and Bernanke recently offered.

Indeed, his objection to Goldman's overview not being serious applies so much more to his own observations/musings.

As to what appears to be Stein's principal objection to Goldman's analysis -- namely, that it is unlikely for the U.S. to experience a 15% nationwide drop in home prices -- Hatzius' contention does not seem unreasonable based on the detailed analysis in the report. Nor is his prediction of a 15% home-price drop an outlier, as it conforms exactly to what the Case-Shiller Futures Market (traded on the Chicago Mercantile Exchange) predicts for home prices.

By contrast, Stein seems to provide no substantive support for his anti-Hatzius view (or of a Goldilocks economic expansion); he simply declares that Hatzius is wrong.

As I discussed yesterday, there is a mountain of economic evidence (which seems to be supported by recent Federal Reserve warnings) that a recession is either close at hand or that we are currently in one.