A commercial real estate bust . . .

is a short term non-event, as far as the level of general economic activity, once you absorb the cost of a slow down in construction and development activity.

Last time I checked, the wind down in construction started late in 2007, and has continued progressively through 2008. Because it only makes sense in extreme circumstances to leave a building under construction unfinished, there is a bit of a lag between the recognition of a problem and the winding down of activity. But existing projects are finished and new ones are cancelled, and, voila, the slow down is underway.

I think that's already happened, for the most part. I'd be willing to venture that larger projects with longer lead times are still under way, but those, too, will wind to a conclusion--frequently in hands of whoever financed their initial stages. And all of the smaller stuff has ground already ground to a halt.

The event, in terms of the economy and the policy response, is the constuction slow down, not the real estate bust. And all the talk about 'shovel ready' infrastructure spending is a pretty good sign that the road map to a resolution of that slowdown is well accepted.

But a real estate bust itself, in the sense of declining property values, decline rents, rising vacancies, foreclosures and involuntary ownership shifts, and workouts and restructurings of existing financing packages is not, in itself, of much concern to nayone except the developers, investors and their professionals. Remember, commercial mortgages don't have to be marked to market (though CMBS are another matter entirely). A real estate loan that is performing, or has gone non-accrual, or is impaired, held in a financial institution's portfolio is subject to an entirely different set of accounting rules (which is not to say that real estate chargeoffs can't swamp the boat and cause the institution to fail--remember the S&L crisis?).

In that dynamic, the question becomes, just how lax and bad loan underwriting became in the insurance companies, pension funds and other institutional lenders to commercial property developers. If the news out of Calpers and the behavior of a couple of major insurance company stocks recently are any indication, underwritings standards did deteriorate. They almost had to, given the availability of alternative source of credit from those originating and packaging CMBS.

If that's the case, it could get interesting. There is something about real estate, its documentation and its culture that seems to lead to more fraud than is typical of the securities markets. That's right, more not less, fraud. We could all speculate on why.