While the world escaped the immediate crisis in Greece and Italy with the selection of excellent technocrats as prime ministers, they have a very long way to go. As experienced as they are as technicians, they are not able to change decades of cultural and political attitudes which badly hamstring business and which have trained the population to become entitled instead of productive workers. Terrible labor laws and all sorts of regulations have built up a network of corruption, tax avoidance and coddling of workers. You don’t change that over night without social and political disruption. Spain is only somewhat better. Ireland is far better, and seems to be headed back onto the road of a semblance of a functioning economy. What all of these countries should have taught the private equity world in the US is that when you go to foreign lands, there are massively different rules and cultures which make investing very different than in the US. Many private equity firms here proved they really did not fully understand fundamental investing in the US, and especially the housing market, in mid decade, so it is clear there are big gaps in fully understanding the real estate markets of the European countries.

The incredible lack of coherent leadership in Europe and the White House is not going to change at least until January 2013. As a result we cannot expect anything much to change in the economies of the western world before then. The Obama administration continues to churn out rhetoric and stop gap useless programs to try to fix the economy. Obama’s latest bit was last evening to claim the problem with America is we are lazy about attracting foreign business to come here. That is not only wrong, but surely not helpful. Whatever the debt committee does it will not even be a start to fix the problems of the deficit. Regulations continue to pour out and Dodd Frank is not even half way to being implemented with Carl Levin claiming nothing about it should be changed. Carl Levin could not even qualify to be a bank teller, but he is claiming to know how to regulate the banking system. The various politically motivated attorneys general at the federal and state level continue to attack the banks. Europe is no longer available to buy the CMBS paper we dumped on them in mid decade. CDO’s are toast for the most part. In short there is going to be a long way to go before CMBS issuance can come close to meeting the demand for refinancing. Banks are being pressed to built their capital ratios to 9% or more. That means a lot less real estate lending and surely a lot less construction lending which carries a higher risk adjustment for capital purposes. All of these issues combined will keep volatility in the bond markets at a higher level than is efficient for refinancing of the $1.4 trillion of real estate debt which needs to get funded over the next few years.

So here is the very likely result. The economy remains sluggish, but improving slowly. Europe and the damage already done here by this administration will not go away quickly even if Obama is replaced. Unemployment remains very high for several years. Consumers remain careful and cost conscious. Digital shopping grows very rapidly and brick stores become smaller and less important. The housing market takes several more years to settle and readjust. Unless the courts and the AG’s let banks rapidly clear the foreclosure backlog, home prices will remain weak or even decline in some markets like Phoenix. There is little chance the avalanche of litigation against the banks and servicers set loose by Elizabeth Warren is going to subside anytime soon. Travel by corporations will remain constrained as they seek areas of their budgets to control costs during this sluggish period. Hiring will remain constrained so office space needs will not grow quickly. The digital revolution will also mean a lessening need for everyone to be in expensive downtown buildings for all functions. It will increasingly be at home or in satellite locations at much lower space costs. Law firms will continue to use less and less space. The good news is far less new buildings of any food group will get built over the next five years, helping to better rationalize space usage.