EconomicCrisis.US

It’s over a year now since the 2008 financial crisis spread havoc throughout the global economy. Dozens of books and articles have appeared to explain what went wrong. They identify culprits ranging from Wall Street financiers overleveraging assets, to ACORN lobbying policy-makers to lower mortgage standards, to politicians closely connected to government-sponsored enterprises such as Freddie Mac and Fannie Mae failing to exercise oversight of those agencies.

As time passes, armies of doctoral students will explore every nook and cranny of the 2008 meltdown. But if most governments’ policy responses to the crisis are any guide, it’s apparent that many lessons from the financial crisis are being ignored or escaping most policy-makers’ attention. Here are five of them.
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Federal Reserve vice chairman Donald Kohn believes that prices of mortgage-backed securities are likely to fall when the Fed eventually begins selling mortgage-backed securities (MBS) from its portfolio, according to a MarketNews International report by Steven K Beckner last Thursday.

The report continues: “He gave no indication when that might be. But Kohn, echoing earlier comments by New York Federal Reserve Bank President William Dudley, said the Fed may well avoid any losses on its asset holdings, as well as on its liquidity facilities. ‘These programs may be unwound without loss,’ Kohn said, commenting from the audience at a Boston Federal Reserve Bank conference. He said the Fed entered the market ‘when prices were depressed by high premiums’ and so ‘the Fed could finance without risk.’ That in turn will mean they can be ‘unwound without loss.’”
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What is $1.42 trillion? It’s more than the total national debt for the first 200 years of the Republic, more than the entire economy of India, almost as much as Canada’s, and more than $4,700 for every man, woman and child in the United States.

It’s the federal budget deficit for 2009, more than three times the most red ink ever amassed in a single year.

And, some economists warn, unless the government makes hard decisions to cut spending or raise taxes, it could be the seeds of another economic crisis.

Treasury figures released Friday showed that the government spent $46.6 billion more in September than it took in, a month that normally records a surplus. That boosted the shortfall for the full fiscal year ending Sept. 30 to $1.42 trillion. The previous year’s deficit was $459 billion.
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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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