Tuesday, March 10, 2009

When will Obama's political bubble burst?

Business Times - 11 Mar 2009

When will Obama's political bubble burst?

New US leader unable to mobilise the Congressional support he needs to bail out Wall St


ON the same day that the US government announced the February unemployment rate of 8.1 per cent - the highest in more than 25 years - President Barack Obama was insisting that his US$787 billion economic stimulus plan would help reverse the depressing economic downturn.

On Friday, a few hours after the Labor Department released figures showing the economy shedding 651,000 jobs last month, Mr Obama was addressing a graduation ceremony in Columbus, Ohio for 25 police recruits who had their jobs saved with the help of US$1.2 million from the stimulus package.

'For those who still doubt the wisdom of our recovery plan, I ask them to talk to the teachers who are still able to teach our children because we passed this plan,' Mr Obama said, challenging those on Capitol Hill and Wall Street who have been critical of his huge federal spending programme.

'I ask them to come to Ohio and meet the 25 men and women who will soon be protecting the streets of Columbus because we passed this plan,' he proposed.

Mr Obama used the speech to announce that US$2 billion in the stimulus plan was dedicated for local and state law enforcement, including US$61.6 million for Ohio, a state that has been hit hard by the recession.

Trying to boost the depleted spirits of the American people, Mr Obama committed the country to fighting the economic downturn, saying that at a 'defining moment' for America it was time to meet the crisis with 'bold action and big ideas', that Americans 'have a responsibility to act, and that's what I intend to do as president of the United States of America'.

Mr Obama's strong rhetoric and sophisticated public relations strategy seem to have an effect on the majority of the American people who, according to the recent opinion polls, continue to maintain confidence in his leadership and economic policies. But then there was a time, at the start of the anti-American insurgency in Iraq, that most Americans were telling pollsters that then-president George W Bush's military strategy would bring about a US military victory in Mesopotamia.

After several months of consistent effort on the part of Mr Bush to persuade Americans that his administration was 'turning the corner' in Iraq, reality did set in and Americans started to lose their trust in Mr Bush's management of the war in Iraq.

Not even the small gain in public security achieved by the US military 'surge' in that country produced any dramatic changes in the Americans' negative attitude towards Mr Bush and the war in Iraq.

Hence the question that should be on the top of the minds of President Obama's aides is whether a lack of real progress on the economic front as opposed to staged media events like the one last week in Columbus could eventually burst what the critics would probably describe as Mr Obama's current political bubble.

After all, almost all indicators, including the bearish stock market, the collapse of the housing market, falling consumer confidence and the continuing financial crunch, suggest that the American economy is going south.

The US economy contracted by 6.2 per cent in the fourth quarter of 2008, and most analysts expect unemployment to soar over 10 per cent in the coming months; in fact, if one calculates into the unemployment figures the number of those who had stopped looking for a job and/or work part-time, the current real unemployment rate could be close to 14 per cent.

So it's not surprising that billionaire Warren Buffett, whose Berkshire Hathaway Inc posted its worst results ever in 2008 and who is one of President Obama's informal economic advisers, told Bloomberg that the economy 'has fallen off a cliff'. And as Mr Buffett pointed out, the efforts by Washington to contain the economic recession and financial crisis through costly government spending and the injection of money into the system would eventually produce a huge inflation.

What seems to trouble most investors on Wall Street and lawmakers on Capitol Hill are the continuing ad hocish and somewhat confusing responses by Treasury Secretary Tim Geithner to the financial crisis. Not a day passes without new reports about financial near-deaths of institutions such as Citigroup, American International Group, or the Bank of America, followed by the many trial balloons floated by Washington, and on some occasions real plans on bailing out this or that company.

The conventional wisdom among political and financial insiders is that the administration needs to come up as soon as possible with a detailed and coherent strategy on how it plans to help America's ailing financial institutions to get rid of their toxic assets of between US$1 trillion and US$2 trillion and create the conditions for a resumption of lending.

Instead, the administration has advanced a series of steps, including a stress test to help establish the financial health of the leading banks and programmes to aid homeowners pay their mortgages.

Mr Geithner as well as Federal Reserve chairman Ben Bernanke have rejected proposals to 'nationalise' failing banks, citing technical and legal obstacles as well as ideological resistance to such a move. But more likely, administration officials probably recognise that a major takeover of these banks could require gigantic amount of government assistance and that Congress, reflecting the public's anti-Wall Street sentiment, will not approve such an effort.

Indeed, it was not easy for the administration to get Congress to approve freeing up the US$350 billion of the second instalment of the bailout plan that had passed last year. And then there was the bloody Congressional fight over Mr Obama's stimulus package and the coming legislative battles over the proposed federal budget.

Hence the problem facing the administration: Mr Obama cannot mobilise the political support he needs in order to bail out Wall Street. But without a speedy and costly resolution of the financial crisis, the chances that the US economy will be on the road to recovery any time soon are very slim.

This exposes a wide gap between Mr Obama's uplifting rhetoric and the depressing economic reality, and erodes political support for the White House.

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