LDS Freedom Forum

Fear and loathing in La Jolla
By Ben Stein
Sunday, October 12, 2008
I lived with them on Montague Street

In a basement down the stairs.

There was music in the cafes at night,

And revolution in the air.

— Bob Dylan,

"Tangled Up in Blue"

A FEW days ago, I spoke to a large gathering of investors in the San Diego suburb of La Jolla, and was startled by the audience's furious anger at the powers that be. The Wall Street-Treasury-Federal Reserve axis is hated, loathed and feared by these people, who were, as far as I could tell, largely Republicans, almost all well to do — or formerly well to do. They are in a state of extreme agitation about how the current mismanagement of our financial system has played havoc with their own personal financial situation.

In fact, they are among the angriest upper- and middle-class people I have ever seen. And the most frightened and worried. (In a way, they are now feeling the way ordinary workers have been feeling for years.)

And why not? With the experiment of allowing a major investment bank, Lehman Brothers, to simply vanish, leaving huge holes in the portfolios of many other financial entities, Henry Paulson Jr., the Treasury secretary, threw the financial system into chaos.

Yes, some people at Lehman undoubtedly did some bad things, but those kinds of people are found everywhere. Letting Lehman fail was almost incomprehensible. It took the U.S. government many decades, after the banking collapse leading to the Great Depression, to restore confidence in the financial system. Then, in one horribly misguided moment, Paulson, with the apparent agreement of Ben Bernanke, chairman of the Fed, demolished that confidence.

Now, we have to spend $700 billion to try to get it back, and it's by no means certain that even this enormous bailout plan will work. Confidence is incredibly important. In a way, it's the only factor that counts in finance. Do markets and lenders have confidence in this plan? Do they have confidence that it will work successfully for the whole country and not just for the Wall Street buddy system? The results in the markets, post-bailout, are dismal.

When confidence is gone, it's really gone. We see the results all around us, in what seems to be a gathering slowdown. For those of us surveying the financial statements we can get online at any moment to destroy our sleep, the recession is already here and it looks a lot like a depression if we add in the losses on our real estate.

So, as I drove home from La Jolla to the comfort of my dogs in Los Angeles, I thought, "Well, what now? Now that we are facing a situation of complete unpredictability with a financial system fluctuating between state socialism and chaos, what do I do?"

I thought I should try to maintain my health so I could keep working and speaking longer and keep supporting my family longer, not to mention the many other people and lenders I help support. I also thought that I would like to keep as liquid as I prudently can, even if it often means selling stock at a loss. Cash is balm in this situation: it lets you sleep. I also thought that I wouldn't be buying a ranch in Idaho, as my wife has wanted me to do — not for some time, if ever.

But in my way, like my father before me, I'm a working man. My work, speaking and writing, is my pleasure. I plan to do it as long as I draw breath. My beloved father, a distinguished economist and writer, was working on differing expectations for inflation as they bear on the price of long-term bonds, with tubes in him in the ICU. I still have the blood-spattered pages of his written thoughts. He didn't need the money. It was his passion. My ideal last day would be speaking and then drifting off to eternity with my economic statistics bulletin and my dogs by my side.

Not everyone feels that way, however. Many people long for retirement. But clearly, many of them are in deep, deep trouble. Even before the recent crisis, the financial situation of large numbers of retirees was desperate. The data for boomers is grim, with only small percentages really able to retire in comfort.

NOW, the case is far worse. People planning for retirement were told they could expect that their savings in broad indexes of common stocks would double roughly every 10 years. But we are now below where we were in 1998. If pre-retirees needed that doubling to get to their savings goals, they are now cut off at the knees. Unless the stock market stages a miraculous recovery, and I pray it does, a whole generation of boomers will be hopelessly far from its needs for savings.

I wonder if Paulson with his hundreds of millions in the bank really understands the terror of those people in the room in La Jolla and the tens of millions like them. I wonder if Bernanke does. I wonder if, as they rolled the dice on Lehman and came up snake eyes, they thought of the fear that would spread throughout the land. What do people — decent, hard-working people — do now? The standard advice would be to buy when the market is down, and it's probably good advice. But only "probably" because we have no idea how far down we'll go or how long it will take to recover. Maybe it is better to be liquid now. But then again, maybe not. Uncertainty and fear rule.

Frankly, I don't know the answer. I just know that for a long time, we have paid Wall Street "experts" unimaginable sums for preparing for our retirement. They still have our money, and we have ashes. And I wonder whose side government is on, which is a bad thought to have, and I wish I didn't have it. As the song goes, there is revolution in the air.