Obama's Treasury Nominee Should Signal Policy Direction

America has a new president-elect. Barack Obama has been embraced not only by traditional Democrats but by many social liberals/fiscal conservatives (just one of many examples here).

Expectations are extremely high. The world seems to be expecting miracles from the new president-elect.

Can St. Barack of Chicago deliver?

The atmosphere today is somewhat reminiscent of the elevation of Nelson Mandela to the presidency of South Africa. During the election people stood in line for hours to vote. There was no violence. People were just happy to be enfranchised. Foreign election observers came away with tears in their eyes. He had magnanimously stated that he held no animosity towards the whites and said in so many words that we are here to build a new nation. Yet South Africa faced many economic challenges that it was not able to solve.

The new Obama Administration also faces daunting economic challenges today. The fiscal implications of the Obama’s election promises remain problematic. Longer term, America is a country with high levels of income inequality and low social mobility, which can result in a class structure that inhibits innovation. That issue was raised by Larry Summers, who is rumored to be a leading contender for Treasury Secretary. In addition, the US government seems to be continuing down the inflationary path of serial bubbles.

Watch the Treasury appointment
If the Obama Administration is to be truly transformational, then the first signal would be the choice of a Treasury Secretary. There are rumors that a new nominee would be named as early as this Friday.

I wrote that Paul Volcker, who is one of Obama’s principal economic advisors, commented that: 

• When the dust settles, he would favor policies that 1) create more financial regulation and oversight; and 2) encourage savings and less spending.
• Beware of inflation: “Inflation is the ultimate destructive result.”

Will America take the easy road down to serial bubbles or will she take the harder and painful road to restructure the economy now? Or could our fate be as Barry Ritholz speculated: 

Inflation from 2002-07, Deflation from 2008-09, hyper inflation from 2010-???

Stay tuned.

Comments

[bosun.j:]

Well thought out, well researched and concise appraisal.

Unfortunately, if you keep writing this way you'll likely be banned from further contributions!

2008 Nov 06 03:30 PM

[LCACM:]

Agree with the author that US needs to stop allowing the FED to create these ultra low interest rate induced bubbles. They should not be allowed to lower the interest rates below 5% Recessions can be tackled by direct infrastructure based development work.

2008 Nov 06 09:45 PM

[irisatrx:]

Workers of the world, UNITE!

This drivel about Nelson Mandela's remedies for South Africa should be tossed in the garbage. South Africa -- pre-Mandela, had one of the strongest economies in the world, and stood as a guidepost for import substitution and self reliance. Corporations from around the world flocked there because it represented a dynamic economy, with unlimited potential.

And then, the NYT gave us Mandela.

South Africa has now plunged to the depths of economic despair, with an unruly population and one of the highest crime rates in the world. International investment has pretty much ceased, and corporations have reduced their presence significantl


But, Apartheid has been obliterated, so, all the residents are now equal, though some are more equal than others.

Can we look forward to similar developments with Obama at the helm?
If the post-election stock market is any indicator, I'd say we might have a problem.

We're now politically correct -- just like South Africa. Will our economy follow South Africa's example?

2008 Nov 07 12:28 PM

[Stock Markets:]

Nobody can argue against prudent regulations in a free market economy. However, regulations should only provide frameworks and overall roadmaps, instead of stifling innovations in this networked world.

2008 Nov 08 01:24 AM