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TDE2012: The crater of the European debt crisis

by Gerald Magpily | Published December 1, 2011 at 1:22 PM

The global economy is still reeling from the stunning bankruptcy of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch to Bank of America Corp. in 2008 for their reckless investing in credit default swaps and toxic mortgages. Now with the recent bankruptcy of MF Global because of bets on risky European debt, investors have directed more ire toward Wall Street.

The big question: Is Wall Street an engine of growth, or is it another big gamble?

The two opposing viewpoints were discussed in The Deal Economy 2012's town hall discussion "Wall Street: Engine of Growth or Trillion-Dollar Casino" at 11 a.m. amongst a packed house of around 250 people at the New York Stock Exchange.

Jeffrey A. Sonnenfeld, Senior Associate Dean for Executive Programs and Lester Crown Professor in the Practice of Management, Yale School of Management, hosted the discussion featuring David A. Levy, the Jerome Levy Forecasting Center; Douglas A. Dacille, CEO, First Principles Capital Management LLC; and Laurence Grafstein, Managing Director and Co-Head of M&A, Rothschild.

The discussion opened with the European debt crisis and how to deal with it and solve it. Grafstein implored governments to take urgent and decisive action . Additionally, the euro zone needs to take a multifaceted approach and not take things to the brink. Grafstein added that the U.S. can make public policies that help grease the European debt market. These suggestions are obviously still a work in progress.

Levy looked at the European debt problem by comparing the Continent to the U.S. He said that the U.S. is basically in a contained depression. Private companies cannot generate profits if the overall sector is decreasing, he said. In the U.S., Levy said, the U.S. has tried to ease the contained depression with the transfer of money from the public sector to the private sector. Has it worked? Maybe. The U.S. economy is still in a malaise, but in Europe, Levy said, the mechanism for this "contained depression" has broken down.

Dacille pointed to the Federal Reserve in the U.S. as the villain who helped create a situation where the MF Globals of the world were induced to take more risk because of the Fed's policy of zero interest rates. "How does a bank make money when you can't compete against the Fed? You punt. You go out betting in the casino," Dacille said.

Unfortunately, for MF Global's Jon Corzine, he bet his firm's money in Europe, and the results we're obviously disastrous.

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