"In the battle between fear and greed, we forget that fear wins some of the time," Linneman said, "and it is winning right now." He added that greed triumphs 75% of the time.
Related to this, he said, we tend to forget there is a fundamental mismatch between assets and liability in the market. Assets are long-lived, compared to liabilities, which are short lived, Linneman added. "As long as greed is winning the mismatch is not a problem."
The third factor behind the capital markets woes is historical global growth, he explained. He added that right now there is more money than brains, which does not necessarily mean there are no brains. "People who normally take three to six months for due diligence are doing it in three to six days," Linneman said. "If you only needed three to six days for due diligence you would have been doing that in the first place."
He added that industry is taking short cuts, conducting business with the mind set "he is in it so it must be OK." "We started seeing short cuts in late '06," he said. "Lenders were saying they did not have time for due diligence on a $50-million piece because they were working on a $300-million piece, and they were relying on rating agencies. It doesn't mean it was bad investment, just that we don't know."
The final factor falls on the feds shoulders, Linneman said, explaining that the difference between the borrowing rate and inflation guaranteed that investors who went short and safe would lose money. As a result, investors went long and risky. "I'm not saying [the feds] did it intentionally," he added. Eighteen months down the road, short and safe started giving a 3% return, "so investors no longer had to go long and risky and everything started to unravel."
He also noted that, just like the writers' strike in Hollywood, investors are now on strike. "They are saying 'until I understand what I am investing in I'm not going to invest.'" Linneman said that he expects the picket line to be up for another three to six months. ""It won't stay up forever." He did add, however, that US economy is still solid.
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