Obama's First Move on the Economy

President-elect Obama cannot indulge in a measured transition. Events compel him to act decisively, through quick selection of a treasury secretary who can work with incumbent Henry Paulson on the banking crisis and by helping House Speaker Nancy Pelosi fashion a stimulus package that Congress should pass in a post-election session.

The banks: The country is in the grips of the largest financial crisis since the Great Depression, and the Federal Reserve and Treasury are throwing more than $1 trillion at the banks through loans and equity purchases. Yet, they have imposed few conditions on the management of the banks. Lending rates remain high and funds scarce for mortgages and worthwhile business loans.

Meanwhile, Paulson is scurrying around considering ad-hoc investments in the likes of General Motors (GM) to finance an ill-conceived merger with Chrysler. The unfolding mess at AIG should indicate that giving broken institutions cash without compelling meaningful changes in management strategy and compensation incentives for executives does not generate good results. J.P. Morgan’s (JPM) announcement that it will rework about $70 billion in mortgages by writing down balances owed and restructuring payments may be the exception that proves the rule.

Obama needs a treasury secretary who will compel the nation’s largest banks, which already have received billions in equity and loans, to do the same, and to rebuild the securitization market that pipelines funds from insurance companies and pension funds to regional banks, mortgage brokers and finance companies that are too cash-starved to help worthy homebuyers and businesses.

Stimulus Package: A recession of unusual proportions is unfolding. Owing to the credit crisis and housing collapse and excessive borrowing to finance a huge trade deficit, built on too much imported oil and subsidized Chinese imports, the economy is entering a recession that may not be self-correcting, unlike other post World War II corrections. Near-term, compelling private efforts to rework mortgages in the J.P. Morgan mode, as a condition for federal largess to the banks, is essential; however, a second stimulus package in multiple installments to limit the depth of the recession is necessary, too.

The lesson of the last stimulus package is clear. Tax rebates gave consumer spending a two-month boost but did not do much else. Too much was spent on imports at the mall, and the money did not do much to stem job losses, even in retailing. Rather, a stimulus package that focused on roads, schools and other public buildings would do much more to generate domestic employment, directly in construction and through purchases of materials and fixtures to refit buildings. Any stimulus will require additional federal borrowing. A stimulus package spent on roads and other needed public infrastructure will leave a legacy in capital improvements that assist growth now and in the future.

Fixing Structural Issues: Longer term, the huge trade deficit, caused by too much imported oil and intervention by Asian governments in currency markets to boost their exports and ship unemployment here, had a lot to do with flooding U.S. capital markets with cheap funds and creating the first credit bubble. President-elect Obama waxed a lot about free-trade agreements in his campaign but failed to adequately explain how he would fix either the oil or Asian-trade messes. Investments in alternative energy sources, as Obama has proposed, can’t fix the oil-import problem alone. Both drilling offshore and windmills, as well as much tougher mileage standards, are needed to make America less dependent on unfriendly Mideastern states.

If China and others won’t stop subsidizing their exports by buying U.S. dollars to keep their currencies and exports artificially cheap, then offsetting taxes on purchases of yuan and other currencies are in order to encourage trade based on comparative advantage. Obama has not said nearly enough about conventional energy development or the China trade problem. Come January, he needs to implement policies on these issues or fixing the banks will only lead to another credit bubble and crisis, the stimulus package will prove a palliative, and neither will usher in lasting prosperity.

Comments

[Still Renting:]

Apparently nobody fully understands the value of INFORMED voters or the danger of loosing too many "uninformed" voters.

I couldn't believe my countrymen were as dumb as to elect that nincompoop, but now that they have, I am investing heavily in popcorn.

It is going to be a VERY interesting ride. Obama will help this as much as FDR helped us out of the depression. The only significant question I have is, will any of the war that gets us out of this one be fought on US soil, or will our major cities just become big glass parking lots before we get the chance...

2008 Nov 17 04:24 PM

[Still Renting:]

Maybe Obama could send all the cubicle dwellers in the cities out into the country to build our country's "autobahn". Heck, it woked for Hitler. For a time...

2008 Nov 17 04:27 PM

[CLH:]

There is little difference between Hitler and Obama. Both socialists.

2008 Nov 17 04:44 PM

[Still Renting:]

CLH,

I completely ignore Godwins law. I just let the reader decide if the shoe fits. If it does, so be it. I was very nervous about the ample use of children in the Obama campaign, but that is peripheral. What really gave me the creeps is, when he really DID quantify or qualify what he meant by change, he sounded eerily Hitlerian. I may be off base, but time will tell. No small number of prominent Americans, at first, thought Hitler would be a great leader and savior of Germany. And don't even get me started on how many Germans felt. Both Hitler and Obama gave us books to see their future vision in their own words, ghostwriters notwithstanding. Maybe Obama's books should be required for reading and, more importantly, analysis, in our public schools, now that he is president-elect.

The warning signs are there, if one can only interpret them correctly.

One thing I will say for sure, if Obama forces the city office cubicle dwellers into the country with pick and shovel to build an autobahn, I'll know something is DEFINITELY up. ;)

2008 Nov 17 05:07 PM

[ElisaS:]

Hi Still renting

You did read the sorry excuse for an economic policy put forward by Mcain didn't you? Talk about uninformed!!

The US voters made the better choice, maybe you should go to the UK or better yet come up with some constructive solutions to the mess that is the US economy.

2008 Nov 17 05:38 PM

[Alamo:]

Mr Morici in describing the multitude of problems, all bordering on monstrous economic crises, failed to include right wing idiocy that offers nothing in the way of solutions.

The lack of brains got us into this mess which now has triggered a world wide disaster like few have seen in their lifetimes and brain power is the means by which we can solve it.

If brains were money, Reagan, Bush1, Bush2, Gramm and Mccain together together raise a dime. Steal it, maybe though.

2008 Nov 17 06:07 PM

[sr9web:]

To CLH: don't be demented. Casually equating the new USA president to a Nazi dictator is grossly absurd.

2008 Nov 17 06:23 PM

[Joshua Lacey:]

We really need to be striving toward making America energy independent.Iran just asked OPEC to reduce production by yet another 1.5 million barrels per day.This past year and the record gas prices played a huge part in our economic meltdown and seriously damaged our society.We keep planning to spend BILLIONS on bailouts and stimulus plans.Bail us out of our dependence on foreign oil. Make electric plug in car technology more affordable. It cost the equivalent of 60 cents a gallon to drive an electric plug in car. The electric could be generated from wind or solar. Get with it! Utilize free sources such as wind and solar. Stop throwing away money on things that don't work. Invest in America and it's energy independence. Create cheap clean energy, create millions of badly needed green collar jobs. Put America back to work. It is a win-win situation. We have to become more poractive citizens, educate ourselves and demand our elected officials move this country forward into the era of energy independence. Jeff Wilson's new book The Manhattan Project of 2009 Energy Independence NOW outlines a plan for America to wean itself off oil. We need a plan and we need it now! themanhattanprojectof2...

2008 Nov 19 08:54 AM