Economist and actor Ben Stein suggests that pessimistic Goldman Sachs economist Jan Hatzius is just shilling for the firm’s traders: Goldman is making a fortune betting against the housing market (and related debt securities), and Stein argues that Hatzius’s extreme pessimism about housing and the economy is at least partly designed to help the firm’s (wildly successful) bets along. Five years ago, of course, the complaint about Wall Street analysts was the opposite (don’t I know it): In those days, analysts were said to be optimistic just to help bankers shovel tech and telecom IPOs out the door.
Stein also notes that Goldman created and sold the very debt products its traders (and Hatzius) are now shorting as fast as they can. Not only is Hatzius conflicted, in other words, Goldman is now making billions betting against the same stuff it was paid hundreds of millions to sell to suckers (maybe even you!) just a year or two ago. Are you mad yet?
If so, get used to it.
Goldman Sachs, like all Wall Street firms, sits between corporations that want to raise money by selling securities at the highest possible price and investors who want to make money by buying securities at the lowest possible price. Every time Goldman facilitates a transaction between these two clients, someone gets the shorter end of the stick.
What’s more, Goldman Sachs itself is both corporation and investor: It competes with both sets of clients. The firm looks out for its own interests first, and Goldman as a whole usually wins. Ironic? Yes. Annoying? Often. A fact of life? The way Wall Street is currently structured, yes. Importantly, this doesn’t mean Goldman can’t add value. (Note that a lot of highly sophisticated clients continue to do business with Goldman Sachs).
The main impetus for Stein’s article, it seems, is that Stein disagrees with Hatzius’s conclusion: He doesn’t think think things will get anywhere near as bad as Hatzius does. Stein makes some smart points, and, for the sake of the economy, let’s hope Stein is right. But let’s also applaud Hatzius for having the guts to say something interesting, plausible, and unpopular (if depressing): There’s safety in the herd, and most Wall Street economists and analysts never risk straying far from it.
The real lesson here is that Wall Street analysts can’t win: No matter what they say, it is easy to suggest that their conclusions might have been influenced by something other than the facts. This is fair, but it’s at least worth noting that Wall Street shares this conflicted condition with many other industries.
As a commentator, for example, Stein has to sell columns, which is far easier to do when he has something sexy and popular to say than when he doesn’t. The number of readers interested in dry critique of Hatzius’s argument might be measured in the triple digits. The number of readers interested in a critique plus the ever popular argument that Wall Street is a den of thieves? Countless.
Does Stein’s need to be entertaining, interesting, and provocative influence the content of his columns? Undoubtedly. Does this mean that I should stop reading him? I certainly hope not.
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