Minefield won't last forever, says economic expert

You're strolling through a peaceful mountainous meadow, and you realize you're in a minefield. You stop. When someone tells you to keep walking, you're cautious at best.

That's the nation's economic situation, said Peter Linneman, a professor of real estate, finance and public policy at the University of Pennsylvania. But the crisis won't last forever, he said Tuesday at NAI Utah's economic and real-estate summit in Salt Lake City. NAI is a commercial real-estate service.

"As long as we don't screw up in a policy way, four years from now, beyond our imagination, capital will be flowing in the economy," he said, noting business boomed four years after the 2001 terrorist attacks.

But policy will be key, he said. In that sense, this is "a dangerous time."

Government policy errors, plus business hubris and political uncertainty are the reasons for the economic downturn, Linneman said. Federal Reserve policies required investors for four years to go long and risky to get a return. Then, suddenly, going short and safe was better.

But businesses' hubris kept many of them seeking riskier investments to make up for the change, Linneman said. Many found a regulatory loophole and left liabilities off their balance sheets, essentially hiding problems from investors.

Now the gig's up, and there's still no transparency, Linneman said. People hunkering in the minefield still don't know where the mines are. Commanders didn't calm the troops; instead, they said they needed a $700 billion rescue or there wouldn't be an economy to speak of — a proposal Congress then voted down until they put their pet projects into it.

"As a result of that, there is no trust" that is essential for the markets to work, Linneman said.

Linneman expects up to 1 million more job losses and the housing market to bottom out early next year. "The great capital strike" will last another year, or maybe 18 months, he said.

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