Economist, Krolicki agree Nevada's in for tough 2009

The American people, especially Nevadans, have a deep economic hole to dig themselves out of. There is light near the top of the hole, but it's a long reach.

"The country has gone through a colossal asset bubble, a run up in asset prices that can't be supported by the fundamentals," said Universtiy of Nevada, Reno, economist Tom Cargill during the Business Council of Douglas County's 15th annual Critical Issues Conference at Carson Valley Inn on Tuesday. "Nevada suffered more than most states. We had one of the biggest bubbles."

Cargill described four stages of the bubble burst.

Stage one was displacement, that which caused the prices of assets to rise above their historical values. In Nevada's case, a "tremendous influx of people" caused house prices to soar.

Stage two was what Cargill called euphoria, or irrational exuberance.

"Prices became detached from economic fundamentals," he said. "The idea that house prices always go up is not true. It's a myth made up by the real estate industry."

Stage three, speculative excess, quickly followed irrational exuberance.

"This is the stage when people were buying four of five houses to flip," Cargill said. "People fell into the bigger fool theory. 'I might be a fool for buying this house for $600,000, but a bigger fool will buy it from me for $800,000.'"

Inevitably, the fourth stage, revulsion, or liquidation, came like a reckoning.

In Nevada, house sales dropped, construction froze, and unemployment shot up. High gas prices discouraged tourists from visiting the state, precipitating declines in other sectors of the economy.

"More likely than not, we will be in a recession in 2009," Cargill said.

He said government intervention is needed at the national level. The amount of the proposed $700 billion bailout doesn't bother him, but he would like to see it tied to market solutions by providing loans to companies and letting them solve their own problems, instead of having the government take over the problems.

Lt. Gov. Brian Krolicki agreed that 2009 will be a rough year.

"I don't see it getting better," he said. "In the last 10 days, things have changed. Banking as I know it is different."

Krolicki said the state might be facing a $1.5 billion shortfall in the future, but he warned against an "irrational malaise."

"We have to figure out how to jump start things in a wiser way," he said.

He described three big projects that could help Nevada climb out of the hole.

"Number one is renewable energy," he said. "We have a bounty of sunshine and hot water in the ground."

Krolicki said Nevada is on track to producing 20 percent of its power from renewable sources by 2015. He said Boulder City has created special zoning for solar activity and hopes other towns and counties will follow.

"It's real, it's green, it's good," he said.

Project two is more of a long shot.

"There is a legitimate chance that the Reno/Tahoe area will host the 2018 Winter Olympics," Krolicki said. "We won't submit a bid if the games are going to be a burden on taxpayers. We're only interested if we can turn a profit."

Project three involves long-term planning.

"We want to make Nevada a gateway of commerce to the Western United States," Krolicki said.

He said Nevada is geographically set up to be a hub for international business. He said the air route between Asia and Reno is shorter than Asia and Los Angeles. Plus, outside investors are attracted to the state's low taxes and nonrestrictive regulatory environment.

"We've gone from four offices to 42 offices overseas," Krolicki said. "There is great opportunity."

Douglas County Manager T. Michael Brown said a healthy business community means a healthy government.

"Every dollar we spend originates in business somewhere," he said. "I'm not certain we are doing every thing we can to make business succeed."

Brown said certain county codes could be updated or rewritten in clearer terms. He also raised the possibility of employing an economic development staff.

"My view is that we have to be really proactive," he said. "We need to diversify our economy while also focusing on the businesses that are already here."

Brown said Douglas County's most valuable asset is its geography, its natural beauty and agricultural heritage.

"We need to focus on our assets, on our world-class recreation and world-class businesses," he said. "A crisis is a good way to bring people together and get motivated."