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The Stench of '89


But then, of course, there is also a dimmer view of our immediate economic future. In this scenario, the subprime mess wreaks havoc. First, it continues to drive down the Dow, as unwelcome surprises continue to crop up (like last week’s scare that bond insurers MBIA and Ambac may buckle under the weight of the $1 trillion in mortgage debt they’ve guaranteed for corporations and hedge funds) and unnerve investors, who hate nothing more than uncertainty. Second, it continues to decimate the big banks, which continue to slash bonuses and lay people off, sucking millions out of the New York economy. Despite the efforts to lessen New York’s dependence on Wall Street, economic Cassandras note, banking is still hardwired into the heart of New York. In 2007, Wall Street capital gains and wages accounted for 25 percent of New York State’s (state’s!) growth. Another frightening factor? After Black Monday, the effects of a Wall Street contraction took two years to spread through the system. This time, “I think layoffs will come sooner,” says Byron Wien, chief investment strategist at Pequot Capital. “Because the traditional structure of mergers and acquisitions is less profitable, you had a lot of traditional-banking people wanting to go into equity and hedge funds”—the areas that are the most vulnerable now. Wall Street already lost scores of jobs in 2007, mostly from the subsectors Wien mentions. If it tightens its belt further, 1989-like numbers aren’t hard to see.

Commercial real estate also affords a bearish view to some observers. Right now, many developers are adopting a wait-and-see attitude before breaking new ground, and a few recently green-lighted projects are already on the skids: Billionaire and likely mayoral candidate John Catsimatidis, whose Red Apple Group is developing a two-block complex on Myrtle Avenue in Brooklyn, is putting the brakes on the project until the lending situation shakes itself out. Even more ominously, some developers who borrowed billions to buy or spruce up major properties find themselves unable to refinance as their loans mature (take, for instance, Harry Macklowe, who last week was forced to hand seven midtown towers, including the GM Building, over to Deutsche Bank). Finally, despite its developer-friendly intentions and healthy capital budgets, city government is proving an unreliable partner. Every big civic project with state or city money in it (save the new baseball stadiums, both well under way) recently took a budget cut. The funding for such much-heralded undertakings as the Second Avenue subway, Santiago Calatrava’s path terminal, and the 7-train extension is in question. Perhaps most surprising, after two years’ worth of adoring press, the dome-shaped Fulton transportation hub—touted as downtown’s answer to Grand Central—is out entirely. Until banks regain the confidence to begin lending again, commercial and civic construction in New York could grind to an almost immediate halt.

The pessimistic line on residential real estate is simple: We’re overbuilt and overpriced. By some estimates, tens of thousands of newly built condos could sit on the market. If the lack of Wall Street bonuses saps demand, we might see quite a few of these condos turned into rentals by 2009, which will, for the first time in ages, make renting a preferable alternative to owning (and speed up the price decline, in a self-propelling downward cycle). The consensus among top real-estate economists quoted in this magazine in September cites the worst-case scenario for New York residential housing as a 5 percent correction this year, followed by a nosedive of 18 percent, in reaction to the sure-to-be-anemic 2008 data, in 2009. As for the theory that foreign pied-à-terre hunters will keep the prices afloat, one need only look back to 1989. Back then, Japanese buyers single-handedly propped up a dead market a year past its expiration date—until they didn’t, which made the ensuing drop all the more steep and painful. Pessimists note that Fed chairman Ben Bernanke and his counterparts abroad have been under pressure to coordinate rate cuts to stimulate the global economy in unison—a move that could bring the dollar into closer alignment with those countries’ currencies, and put a jarring end to the foreign buying spree in New York.

As for retail, the ultrahigh end of the market, influential as it is, only accounts for so much spending. A national or, worse, global recession is sure to shorten the lines for The Lion King and leave scores of hotel beds open. And New York as a global superbrand is bound to be less appealing if the store starts running out of money for glass condo towers, transit hubs, and other glitzy developments.

So what’s it going to be? A slowdown or a meltdown? And how long will it last? Most economists agree that the long-term prospects for both the U.S. and New York economies are good. But shorten the time horizon to six months, or even a year, and few experts predict much of anything good. It’s going to take at least that long, the consensus seems to be, for the subprime-mortgage mess to be absorbed and filtered out by the system. Beyond that, no self-respecting pundit could really say what will happen. Which is not to say that many won’t try.

Additional reporting by Kari Milchman.


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