Monday, January 28, 2008

Ben Stein on the Meshuganeh Market

What a punum!

I just got around to reading Ben Stein's provocative column in the New York Times yesterday, which suggests that the stock market is overreacting to the subprime mess, and doing so because traders are manipulating the market.

Stein has been pilloried for this column in unusually strong language. Too strong, really.

I say that because, if he's right, it would be good news. It would mean that the market is being temporarily manipulated and thus, if markets are reasonably efficient, will swiftly rebound and stay rebounded.

As one whose bucks are tied up in index funds and such, I'd like to believe that. It's a harmless hypothesis, so what's all the fuss?

Some years ago there used to be a theory that traders for the big houses used to game the market by something called "index frontrunning." That is, they would cause the indexes to move, and profits from prepositioned trades designed to take advantage of such a move.

I wrote about it for Business Week and..... nothing happened. Apparently it wasn't happening, or if it was happening it wasn't caught. It was still being "studied" as of 1991, and since then it has been conveniently forgotten.

So Stein is making a less-than-credible if conceivable assertion. We all do that from time to time. Let the man be.

© 2007 Gary Weiss. All rights reserved.

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