Book Excerpt January 19, 2010, 2:18PM EST

Book Excerpt: Thriving in the New Economy

In an edited excerpt from Lori Ann LaRocco's new book, The Home Depot co-founder Ken Langone writes about debt, liquidity, and investment opportunities presented by the financial crisis

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From the time Bear Stearns was sold, throughout the entire next six months until Lehman Brothers was allowed to go bankrupt, it was clear that the rangers were looking for a way to contain this forest fire. The lesson we all got from the depression was that a lack of liquidity only exacerbates the problem. So to the government's credit, it inundated the markets—I mean swamped the markets, flaunted them, with cash of various sizes and ways of getting the money in. For example, it had the Troubled Asset Relief Program (TARP) money, then it had the Term Asset-Backed Securities Loan Facility (TALF) money, and before the TARP money, it was going to loan money to the banks to make loans, which I found a bit contradictory because that's what got us in trouble. Too many people were borrowing money that they couldn't pay back.

Economic Reality

As the economy began to respond to this financial crisis, people reacted by pulling their horns in. General Motors and Chrysler were on the edge. Ford is a different story. I push Ford over to the side because Ford borrowed a lot of money—a lot of older money—and still has it. When sales of automobiles tanked, dropping from $12 million a year to $11 million, then to $10 million, and now it looks like $9.5 million, GM's and Chrylser's market shares eroded. They both ended up needing to be put into bankruptcy, but not before the government gave them significant sums of money in December 2008. I said it then and will say it again now: There was a strong feeling that Chrysler and General Motors should have been allowed to go bankrupt in December 2008.

But the government gave them something like $60 or $80 billion. Will the government ever get it back? Who knows. In order for General Motors to be worth $50 billion, and assuming the 500 million shares of stock outstanding was there and not wiped out in bankruptcy, the stock would have to go to $100 a share. I don't see it in the cards.

So we have put ourselves in a position where we have dissipated enormous pools of assets; we have exchanged them for assets such as homes and cars that have had a significant erosion in value. How do you deal with that? …

The president said properly in early June 2009 that we do not have any more money. At least we understand that if we print any more money, we are almost guaranteeing the problems that I am concerned about.

So none of us alive, none of us, and I am going to be 74, have seen anything like this. It is all new. We are looking at an environment where huge sums of paper called money are flooding the system. That was a necessary condition for activity in September 2008. The Fed is monetizing the federal government's debt. That typically leads to inflation. All of us who remember the 1970s remember stagflation. We had an economy that was stagnant and prices that were going through the roof, not because of supply and demand but because of this enormous flood of cash.

When I read in the paper that the government is going to start allowing some of the financial institutions to repay the TARP money, I found that very constructive. But that doesn't take away from the fact that we have a fundamental underlying problem, which is this surge of cash coming. And I don't know how we can have a robust economy with our two biggest industries—housing and autos—in the tank.

Now maybe I am wrong, but I do not see the automobile industry really perking up for a couple of years. I think you look at supply and demand of homes, and we probably have a three-year window. Yet through it all, I am optimistic. The first step to solving a problem is to acknowledge that you have a problem. We are doing that. The second step is to determine what technique to use to address the problem. What can I do to try to solve the problem? I am very concerned that we have gone beyond reasonable limits in funding all these different institutions. I am not sure I agree with this notion. I know we had to do it to prevent a depression. But I am still concerned about it.