Economists, Finance Leaders Take Capital Markets’ Pulse at Manhattan Conference

How the global financial system got to its current state–and prospects for commercial real estate capital markets–took center stage Monday at a capital markets conference in Manhattan sponsored by the law firms Goodwin Procter L.L.P. and SJ Berwin L.L.P. In the keynote addresses that bookended a morning of panel discussions, two leading economists offered an historic perspective, warned against impatience and offered suggested plans of attack. “Bailouts are only part of the story, folks,” said Carmen Reinhart, a professor of economics at the University of Maryland, during her opening keynote address. “The longer it takes to solve problems, the higher the price tag.” A delayed response to a financial crisis increases both the toll on the economy and the eventual cost of resolving the situation. Reinhart argued that speed is more important than polish when it comes to developing a rescue strategy. She reported that she has been disappointed by government waffling since Congressional approval of the $700 billion rescue package. “What we don’t need is another layer of policy uncertainty,” she said. History suggests that several rocky years are ahead, Reinhart argued. Rescuing a banking crisis that began in 1992 cost Japan about 24 percent of its gross domestic product. Japan’s ration of gross debt to gross domestic product now approaches 200 percent–a drag on the nation’s once-vibrant economy, Reinhart noted. “The true legacy of financial crises is a lot more government debt.” During the presentation that concluded the conference, Yale Professor of Economics Robert Shiller was reluctant to predict that current conditions will lead to a depression on the scale of the 1930s. But Shiller, author of the 2000 book Irrational Exuberance, did tell the audience, “Something big is happening. We have to think like historians.” As part of extensive historic analysis, Shiller found that stock market volatility has reached current levels only a few times in the past 80 years–including during the Great Depression. But Shiller emphasized that intangibles like psychology often influence economic trends at least as strongly as mathematical formulas. As for long-term solutions, Shiller suggested strategies ranging from subsidies for financial advisors to improved financial disclosure and workout provisions built into residential mortgages. In between keynotes, panelists presented a wide-ranging view of the real estate capital markets’ prospects. During a discussion of loan extension strategies, Prudential Mortgage Capital president David Twardock said, “If the cash flow is there, if borrowers are willing to put in a little more equity, lenders will be open [to granting an extension].”Jackie Brady, managing director for Capmark Financial Group, said that the CMBS market could return some time in 2010. A panel on the 2009 outlook for the global REIT market offered differing perspectives. “We’re going to see IPOs, we’re going to see consolidation, we’re going to see bankruptcy–we’re going to see it all,” said Steven Wechsler, National Association of Real Estate Investment Trusts president & CEO. Steve Sakwa, managing director for Merrill Lynch, followed Wechsler’s comment by predicting that more shoes will drop for REITs next year. He also argued that a large number of IPOs are unlikely in 2009, considering that even some blue-chip REITs are having a hard time securing debt.