Financial Rescue Efforts Miss Mark: Wharton School’s Linneman

The federal government’s efforts to steady the financial markets may be well-intentioned, but they are not addressing the heart of the problem, argues real estate finance expert and economist Peter Linneman. “Lest you think that nationalization is a panacea, we’ve been to this movie before,” said Linneman, a professor of business at the the University of Pennsylvania Wharton School of Business. He made the remarks Friday afternoon during a Webinar sponsored by NAI Global and moderated by Jeff Finn, the firm’s president & CEO. The history of government-controlled banks is rife with political scandal, insufficient lending and inefficiency, charged Linneman, who also serves as NAI Global’s chief economist. A massive intervention in the banking system also misses the mark because it fails to boost investor and public confidence, which Linneman views as the real issue. “Buying assets does not increase trust, it just shuffles around money,” Linneman said. “People need to know where things are.” As long as the extent of losses remains largely unknown, lenders will sit on their hands to avoid the possibility of getting burned, he contended. That will stall the credit markets and the economy. Ironically, the economy does have the capacity to handle the losses over a long period of time. Even $500 billion in losses would account for only a fraction of the $75 trillion in the U.S. economy is expected to generate during the next several years. Linneman suggested that the government would have been much better off taking an alternative approach to unblocking. Rather than buying massive amounts of paper, the government should have decided to guarantee all loans made during between 2004 and early 2007. That would have instantly increased the status of all loans to government grade, thereby increasing investor confidence and helping re-start capital flows, Linneman argued. Linneman also chided federal officials for instilling panic rather than confidence in the public. He described what he regarded as a steady stream of blunders, ranging from the Bush Administration’s sky-is-falling rhetoric to Congress’ rejection of the original proposal supported by party leaders. As the recession grinds on, the retail sector will take a hit from slower spending by consumers, even the more affluent people on the spectrum who are relatively unaffected. There will be a certain number of stores shuttered by weaker retailers; however, Linneman said, “The real problem is you don’t have many store openings. The hospitality and office sectors will also slow, and distribution centers will hold up fairly well, even though demand will eventually fall off there as well.