Ben Stein's weekly column in the New York Times is the econoblogosphere's equivalent of a horrible car wreck on the freeway. Even though they know they shouldn't rubberneck, that they should just keep their eyes glued to the road ahead and go about their normal business, the financial news junkies of the world just. can't. look. away.
The resulting contortions are entrancing. In his regular "Ben Stein Watch" feature Portfolio.com's Felix Salmon is so distraught by Ben Stein's most recent effort that he unloads 500 words of his own trashing Stein's "860 words of utter gobbledegook" without once even mentioning what the column is actually about. Likewise, Naked Capitalism's Yves Smith adds another 421 words of commentary labeling Stein "the Weekly World News of economics writing," but also can't bring himself to address the content.
Both bloggers, however, name-check Dean Baker's analysis. And demonstrating that even a cavalcade of content-free blogger despair can extract a pearl from the most unlikely oyster, Baker, the co-director of the Center for Economic and Policy Research, turns the 10-car pileup into a learning opportunity.
The gist of Stein's column, "I pledge allegiance to the United States of hedge funds," is simple: Since hedge fund manager Steven A. Cohen is renowned for earning a 40 percent annual return, an easy way to get rid of the federal government's deficit would be for the government to hand Cohen a check for $10 trillion. Two years of 40 percent returns and the national debt is paid off!
Dean Baker uses this thought experiment as a chance to discuss the theory that stock market speculation of the sort perpetrated by successful hedge fund managers leads to more efficient "price discovery," which is supposed to be good for the economy. But in Baker's views the gains are not enough to offset the real impact of a big hedge fund winner, which is that for every big score, someone else is a big loser.
As Cohen and other hedge fund whizzes comprise a larger share of the market, returns for everyone else will fall ... To take Stein's example, suppose that Cohen got a $10 trillion check from the government to invest in the stock market, as he suggested. Let's assume that Cohen invests this money in the stock market and gets his usual 40 percent return.
The total value of the stock market is currently about $20 trillion. Given current stock valuations and an inflation rate of 3 percent, we should expect an 8 percent nominal return on this money, or about $1.6 trillion in dividends and capital gains. But, Cohen will have generated $4 trillion in earnings on his $10 trillion fund. That leaves the rest of us with losses of $2.4 trillion on our holdings. Because Cohen was quicker than the rest of us, we ended up buying high and selling low.
So, this is the true lesson that Ben Stein wanted us to learn from his column and he had to use the absurd example of having the government lend $10 trillion to a hedge fund manager to make his point. Hedge funds make their returns at the expense of other investors. The more money taken by the hedge fund boys and girls, the less for everyone else.
And that concludes this week's installment of "Watching the Ben Stein Watchers."