Panic is driving much of the economic crisis, so "just breathe" may be the next step in fixing it, Wells Fargo economists said Tuesday.

In presenting the company's economic forecast for 2009, James Paulsen, chief investment strategist for Wells Capital Management, predicts the economic free fall will flatten out in the second quarter of 2009 — if people can return to more normal consumer behavior.

"A lot has already been done — maybe too much — and it will probably work," he said of the federal government's efforts to stimulate the economy. ... Our biggest problem is fear."

Since 1900, there have been six stock market panics. With the exception of the Depression, each recovered within 18 months. "History says that what falls hard and fast typically recovers hard and fast," he noted.

But an unprecedented level of fear has been fueled by the public handwringing of policymakers, he said. "I wonder how much of this would have happened if they hadn't scared the jeepers out of everyone."

Economic crises in the last century have been typically three-fourths fundamental problems and one-fourth fear. This time, the mix is reversed. Banks are selling at a loss perfectly good loans that are likely to pay on time. Instead of spending, people and businesses are holding onto their money "in case." And while there is a crisis of credit, "it's mostly a crisis of confidence," Paulsen said.

Recent bank failures don't come close to the number that failed in the 1980s and '90s, he said. And while bad debt is "up a lot" from record lows, it's well below where it was between '84 and '94. "Bad debt" is debt that won't be repaid; 3.6 percent of debt is now considered "bad." Meanwhile, nonfinancial corporations look as strong as they have in the last 40 years, he said, and corporations have more cash to debt than in the last 50 years.

Paulsen said he expects to see increasing unemployment the first quarter of 2009, but said most of the problems will be at the hands of "healthy players who are frozen." The combination of player panic, credit freeze and high consumer debt are among the factors driving the recession. "But it could come out hard and fast if we thaw that healthy player panic," he predicted

It also creates, he said, "fantastic investment opportunity."

A report distributed at the briefing, "Wells Fargo Focus 2009: Crisis and Opportunity," says the worst of the credit crisis may have passed. It cites:

• Financial institutions are rebuilding balance sheets, aided by federal interest rate cuts, money from private equity funds and sovereign wealth funds, among others.

• Interest rates have dropped for the credit-worthy, with improved credit-market liquidity and a sharp drop in mortgage rates.