US economy waits for its saviours

Business Times - 25 Nov 2008

The transition provides an opportunity to highlight the ideological differences between Reaganomics and Obamanomics


FOR those of us who had got used to former Pentagon chief Donald Rumsfeld saying over and over again that 'We seemed to have turned a corner in Iraq' - only to discover again and again that things were getting worse, there was a sense of deja vu listening to Treasury Secretary Henry Paulson reassuring reporters last week that he wasn't expecting another collapse of a major financial institution.

'I've got to tell you,' Mr Paulson said. 'I think our major institutions have been stabilised. I believe that very strongly.' But by the end of the week, we found out that notwithstanding Mr Paulson's assurances, in reality, the stock market was falling and falling. . .

In particular, financial institutions were very hard hit, especially Citigroup whose shares lost half their value after reports that the respected financial giant was considering a sale. Is it possible that our major institutions have not been stabilised?

But, to be fair, it would be a mistake to compare the Bush administration's faith-based community of foreign policymakers who helped to draw America into the Iraq quagmire to that administration's very realistic members of the economic team who seemed to have been doing their best in dealing with the current financial crisis.

One could criticise Mr Paulson and Fed chairman Ben Bernanke as not being very effective in spotting the coming financial storm and in managing the mess in Wall Street. But one would not describe them and their aides as 'dreamers', such as the guys who were fantasising about establishing Western-style democracy in the Middle East.

The dreamers in the case of the American economic policy as it evolved in recent years were the investors and their allies on Capitol Hill, the media and the think tanks who kept assuring us that the combined forces of globalisation and free-market economic strategy would usher a never-ending era of global economic prosperity; we would witness the end of business cycle, low inflation, low unemployment, narrowing deficits.

Unshackle the financial market from the chains of government regulation and we would all grow rich and have access to an open line of credit to purchase everything we fancy while the Dow Jones zooms to 13,000 and beyond.

Those dreams that were shared by homeowners, small businesses and retirees are now buried under the ruins of Lehman Brothers and many other banks, mortgage institutions and insurance companies. We have a financial nightmare whose magnitude even the greatest minds in the field of economics, some of whom are working in the Treasury Department and the Fed, have yet to deconstruct. It leaves Mr Paulson, Mr Bernanke and their aides with no other choice but to muddle through this financial crisis.

Even if the economic officials in the Bush administration were able to unravel the mystery of the Great Crash of 2008 - we need to be reminded that, after all, economists are still debating the causes for the Great Crash of 1929 - the current unstable economic and political environments would have made it difficult for them to move beyond the trial-and-error nature of their policies. They have cut interest rates down to one per cent, mailed cheques to American consumers aka economic stimulus package and, yes, bailed out the financial behemoths of Wall Street and would bail out very soon perhaps Detroit's Big Three and the other big companies tittering over the economic abyss.

Consider some of the dramatic changes that have taken place since first indications of the sub-prime crisis became evident: From an economy threatened by rising energy and commodity prices and the possibility of inflation raising its ugly head, we are now supposedly entering into a period in which deflation is apparently going to be our main bogeyman. From the stage in which we were seeing signs of a mild recession, we have taken a turn straight into a deep recession, and perhaps even a Great Depression II.

First, there was a lot of talk about emerging economies being 'decoupled' from the American mess, only to learn later that the downturn has been globalised and is experienced now by all the G-20 economies. Even the dependable American consumer had abandoned the shopping malls which would make it more likely that more American retailers won't survive the Christmas shopping season.

All of the above and much more have created an environment in which economic and political sci-fi has become a reality: Washington takes over slices of Wall Street and the Federal government - led by the devotees of Milton Friedman - nationalises banks and insurance companies, just like socialist Sweden.

Well-to-do Americans lose a third of the value of their homes and retirement plans and legendary American companies file for Chapter 11 (go bankrupt). American style of capitalism is being trashed by European, Asian and Latin American leaders who for decades have been forced to listen to sermons from the free marketers in Washington.

And finally, the economic misery is translated into an electoral revolution - a young, charismatic and highly intelligent African-American politician is elected as president after he promises to replace the laissez-faire model with a more progressive one.

And now we are in a transition period - an 11-week wait or interregnum - during which the outgoing administration is losing its power and/or its will to deliver dramatic changes - and the incoming administration that cannot yet deliver on its many pledges.

President George W Bush may be history. But President-elect Barack Obama does not have the authority to make decisions. So Americans, including consumers and investors, reside now in this no-man's land.

In a way, the transition has also provided an opportunity to highlight the ideological differences between Reaganomics and Obamanomics. 'No way!' insisted the Republicans in the White House and Congress in response to the Big Three's request for US$25 billion to save the American car industry.

'Way. But. . .' is the manner in which Mr Obama and the Democrats are responding to Detroit's cry for help. 'Show us a plan detailing how you'll reform your companies (especially when it comes to adopting 'green' technologies), and we'll show you the money!'

Similarly, while the Republicans will only consider mailing a few more cheques to Americans and are certainly not willing to apply government power to prevent more home foreclosures and to increase financial aid to the growing army of the unemployed, Mr Obama and his allies on Capitol Hill are envisioning a huge economic stimulus package plan, including, among other things, tax cuts for the middle class, assistance to home owners, and public works for the unemployed, that will all be part of an ambitious Keynesian fiscal shot in the economic arm of the nation.

With the recognition that the Fed's power to get America out of the recession has become more limited, Mr Obama's economic aides are now counting on an interventionist federal government to serve as a powerful engine that could pull the economy towards recovery.

So at the end of a miserable economic week - huge declines in the stock market, shaky credit markets, the Big Three on the verge of bankruptcy and concerns of more corporate bankruptcies - came Mr Paulson's statement that he would leave the final US$350 billion of the bailout money for the Obama administration in January; in short, it was a depressing sight of a paralysed government and economy.

So it was that President-elect Obama and his aides decided that it was time to fill the political-economic vacuum in Washington and to try to start using their influence to lift the spirits of the depressed markets and perhaps even prevent a panic that seemed to be building up worldwide for a few days.

On late Friday afternoon, just as the Dow Jones was continuing to tumble, NBC News reported that Mr Obama was planning to name New York Federal Reserve chief Timothy Geithner to be his Treasury Secretary. And guess what? A few minutes after the news about the selection of Mr Geithner broke out, the Dow Jones started surging up nearly 500 points.

Key policymaker

In fact, by the end of the day, additional news reports indicated that Mr Obama would announce the selection of Mr Geithner as Treasury Secretary and the make-up of his entire economic team this week. Together with Mr Paulson and Mr Bernanke, the youthful-looking and telegenic Mr Geithner has been one of leading policymakers dealing with the current financial crisis and, in particular, managing Wall Street bailout.

And not unlike the election of Mr Obama, 47, as US president, the selection of Mr Geithner, 47, as the next Treasury Secretary would symbolise a major generational and cultural change in government in Washington. Like Mr Obama, Mr Geithner is highly educated (Dartmouth College and Johns Hopkins University) and has lived and travelled around the world (completing high school at an international school in Bangkok; studying Japanese and Chinese; and spending time in East Africa, India, China and Japan).

After completing his studies, Mr Geithner worked for Kissinger and Associates for three years and then joined the International Affairs division of the US Treasury Department in 1988. In 1999, he was promoted to under-secretary of the Treasury for international affairs and served under Treasury secretaries Robert Rubin and Lawrence Summers. Mr Summers, who was also in the running for the Treasury secretary's job, will serve as a senior economic adviser to Mr Obama and would be in line to replace Mr Bernanke as Fed chairman when he completes his term in 2010.

Mr Obama, Mr Geithner and the rest of the economic team will not be making decisions affecting the American economy and the financial markets until after the presidential inauguration next month. But the immediate response in Wall Street to Mr Obama's announcement was a clear sign that investors and consumers alike were confident that help was, indeed, on the way.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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