Ben Stein on the Financial Crisis: Liquidity v. Solvency

Dean Baker has one problem with the latest from Ben Stein:

Ben Stein is back, telling people that it is important to save money in order to protect themselves against the sort of downturn that the economy is now seeing. While few would argue with the view that people should try to put some money aside, most people get paid less than Mr. Stein and do much better work.

Imagine that – during a period where the concern is a lack of aggregate demand, Ben Stein advocates that we consume less!

I have another problem with Stein’s musings:

Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.

Time to turn the microphone over to Brad DeLong:

So she has become a Mellonist. Back in her (and Milton Friedman's) Monetary History of the United States, she argued that Treasury Secretary Andrew Mellon and company were wrong when they told Hoover, as Hoover put it, to liquidate the economy: “The 'leave-it-alone liquidationists' headed by Secretary of the Treasury Mellon felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate'. He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'...” But today she says that Andrew Mellon's policy is the right one.

Stein continues:

The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t. After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks.

Huh? The Mellonist policy that Stein and Schwartz advocates was to let Lehman Brothers fail. We did and that started the crisis? So Stein recommends we continue with this policy? Ben Stein – Confused R Us!

Update: Felix Salmon notes that Ben Stein does not even understand the concept of insolvency!