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Last Updated: November 14, 2012 09:13am ET

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How Much of a Threat Is the Fiscal Cliff?

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Knakal: Congress is dealing with the
"parsley on the plate, not the steak.”

NEW YORK CITY-As the US economy inches closer to January 1, so comes yet another doomsday scare . . . This one the so-called fiscal cliff, the ominous package of tax increases and spending cuts tied to a corresponding reduction in the budget deficit. But is it a harbinger of economic calamity, or will a deal be forged to avoid it? Some observers are optimistic about a pre-precipice deal while others are more skeptical.

“They’ll solve it and there won’t be a fiscal cliff,” says Joel Ross, principal at Citadel Realty Advisors. “You can’t have it happen and everyone knows it. At the end of the day if they really do go over the cliff, everyone in Washington gets obliterated. The voters will go nuts. Europe will go nuts. It will not happen.” Negotiators won’t be starting from scratch.

Ross says behind-the-scenes negotiations have been pursued over the past several months between the business community, Wall Street and the Obama Administration having laid the groundwork for possible deals that may take on some aspects of the Simpson-Bowles plan to deal with the national debt. Ross says Democrats and Republicans know what needs to be done, but it’s a matter of hammering out a deal in such a way that all involved can save face.

Bob Knakal, chairman of Massey Knakal Realty Services, says going over the cliff would play all sorts of havoc with the economy. Taxes would rise, and that would negatively impact job creation and GDP growth would be slowed. “It would negatively impact every underlying fundamental of commercial real estate,” Knakal says. “Layer on top stalled economic growth, and you are heading into another recession. The likelihood of a recession is much higher today than it was a year ago and this would just be another straw.”

Knakal is hopeful but not quite as positive as Ross that there will be a resolution by the end of the year. He says if real estate deals were negotiated in full public view the way politicians negotiate debt deals, nothing would ever get done.

“Intuitively, you would have to think there is a good chance, but if the current Congress has shown anything, it has shown tremendous expertise in not being able to accomplish anything,” he says. “In order to get something done, the president should show some leadership, call the top leaders of both parties into a private conference room and start negotiating. You don’t negotiate something like this in the media.”

Ross says a deal would help relieve economic uncertainty and would allow capital markets to function normally, allowing people in real estate to get loans at fairly low rates for another year or so. Business confidence will gradually return and companies would start investing more. He believes the eventual deal may involve raising taxes on those making more than $1 million and eliminating deductions.

Knakal suggests that President Barack Obama should again call on former President Bill Clinton to provide some of his leadership skills to help craft a deal. “I would like to be optimistic that they will get something done,” he says, “but I’m not confident it will happen. More important, the real issue is not so much the fiscal cliff as it is dealing with fundamental problems such as entitlements. If they are dealing with anything other than Social Security, Medicare and Medicaid, they’re just dealing with the parsley on the plate, not the steak.”

Even a delayed deal is better than none, says Ross. If a deal is reached in the first part of 2013, it will still be bad, but things will get better during the second half of the year.

However, he says the looming issue of Iran will cast another dark shadow. “Something will happen with Iran during the first six months because it can’t not happen. That will disrupt everything for a while, so that is still out there as a huge black swan. It’s not going away.”

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