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Barack Obama’s chance of a lifetime

Barack Obama’s chance of a lifetime
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First Published: Wed, Oct 15 2008. 12 16 AM IST

Updated: Wed, Oct 15 2008. 12 16 AM IST
If Barack Obama wins on 4 November, as looks likely, he’ll inherit an economic mess rivalled only by the one that faced Franklin Roosevelt in 1933. The world economy is much more interconnected today, so a collapse of confidence in US economic management would be devastating.
Obama must concentrate on restoring monetary stability and preventing the disintegration of world trade, but the modest transfer payments in the economic proposals he released on 13 October won’t hurt.
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Obama will not initially have full national support. Moreover, his well-publicized past associations with unpleasant leftists will make markets highly suspicious of any hard-left policies or appointments. But a market-friendly Obama would have great advantages. His current economic advisers are market-oriented and well respected; and he could always tap Clinton-era treasury secretaries Bob Rubin and Larry Summers for ideas. Also, his global popularity will increase his influence with foreign governments.
Obama’s task will be to steer the country out of a major recession quickly and with minimum value destruction. He should make federal money available to sound banks and companies, but at a cost well above inflation. He should stop buying troubled assets, which diverts capital from more productive uses. He should raise interest rates sharply, since massive federal budget deficits, further handouts and negative real interest rates could threaten hyperinflation.
The cost of financial sector bailouts will dwarf that of short-term assistance, but Obama must ensure his programmes do not undermine market structures. His proposed three-month fore closure moratorium weakens the value of existing mortgages and will attract political pressure to extend it. However, his “middle class tax cut” and his modest proposals to create jobs and improve consumer liquidity wouldn’t increase the government’s size, although they would relieve hardship and release funds that could re circulate rapidly through the economy. Tax increases and major spending plans must wait until the economy is restored.
Internationally, Obama must preserve free trade flows and discourage foreign governments from pursuing protectionism or wholesale nationalization. As a popular moderate leftist, Obama is well placed to proselytize for these goals. And, if he restores the economy successfully, Obama will possess immense political capital that he can use to pursue other policy objectives.
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First Published: Wed, Oct 15 2008. 12 16 AM IST