EconomicCrisis.US

In the early days of the credit crisis, a few of us on Wall Street and in the media, myself included, worried that the imminent blow to the markets and economy would come, not from mortgage-related debt, but corporate debt, specifically the debt used to finance the private-equity buyout boom.

We were definitely wrong about the timing, but there’s mounting evidence we were right about the problem.

The debt piled on companies amid the decade’s $1 trillion buyout boom is coming due. The only question is about the extent of the fallout. The day of reckoning could simply be disruptive for the parties involved, or it could bring down the whole economy in much the same way bad mortgages broke confidence in the credit markets, effectively grinding them to a halt.
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We’ve always been impressed by David Einhorn, the young manager of Greenlight Capital. Einhorn made our Ten To Watch list this past August for his prescient shorting and outspokenness about the shenanigans going on at Lehman. (His fund had been up by more than 20 percent in the first half of this year, fueled by his bearish bets; he had almost no long positions. Wonder how he is faring these days.)

In a speech to the Value Investing Congress yesterday (the speech was called, “Liquor Before Beer, in the Clear”), he paints a dim view of our financial system and the government’s role of enabler. Einhorn didn’t use the word bankruptcy, but he thinks the stimulus package is a “black hole” that, in the long run, will not produce long-term economic value. It’s all short-termism, so that elected officials can say they are doing something—and seek reelection.
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A year after the financial system nearly collapsed, the nation’s biggest banks are bigger and regaining their appetite for risk.

Goldman Sachs, JPMorgan Chase and others – which have received tens of billions of dollars in federal aid – are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis.

That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say.
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Deficit spending and government debt are reaching a level that could culminate in another economic crisis as big as the one that hit the United States last year, Minnesota’s Republican Governor Tim Pawlenty told CNSNews.com.

“One of the main things I’m very worried about is this administration and the Democratically-controlled Congress running on a pathway to bankruptcy,” Pawlenty said. “I mean, we have a reckless amount of deficit and debt in this country. The Obama administration and this Congress are exponentially growing that.”

The $787 billion stimulus package pushed by the Obama administration and congressional Democrats was supposed to salvage the tanking economy, but that measure – along with the $700 billion bailout of the financial industry pushed by the
Bush administration and supported by Obama – will boost the nation’s debt by $9 trillion to a total of $14.5 trillion by 2019, according to the non-partisan Congressional Budget Office.
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