Posted on November 7, 2008 by David Laidlaw
The election of Barack Obama will influence the economy and the markets; however, the impact will be more muted than anticipated.
Obama’s first challenge is to assemble an economic team that will formulate a plan to shore-up the economy and the financial markets.His short-list of potential Treasury Secretaries sounds promising.These names include Paul Volcker, the former Chairman of the Federal Reserve, Tim Geithner, the current President of the New York Federal Reserve, and Larry Summers, who served as Treasury Secretary during the Clinton Administration.All of these individuals are battle tested and have dealt with previous (though less threatening) periods of instability.A strong Treasury appointment would calm the markets which have been reeling as a result of the worsening recession and mounting job losses.
Any response to our problems should also be principled and consistent.The Paulson/Bernanke response has appeared desperate as the government has lurched from one solution to another hoping that something works.For much of 2007, the deflating of the housing bubble and financial problems were viewed as one-off events that did not threaten the system.Once the administration realized the seriousness of the problems, they helped JP Morgan bailout Bear Stearns followed by the nationalizations of Fannie Mae, Freddie Mac and AIG.Realizing they couldn’t afford to buy all of Wall Street, the Feds let Lehman fail which started the extreme credit tightening and panic selling we have experienced for the past two months.
The next phase of the rescue was the passage of the plan to buy troubled assets from banks to address the problem in a more systematicmanner.We have no idea where these efforts stand since the administration then decided to follow the United Kingdom’s lead and recapitalize the banks directly.This frantic activity has only added to the fear in the market as most investors reacted by selling everything with any risk once they realized the government itself had no idea how to solve our problems.In contrast, if Obama’s team is able to articulate what went wrong and what mechanisms they will use to attack those problems, the economy and the markets will be able to recover more quickly.
On the other hand, we also believe that the government’s influence on the economy and market levels are limited, especially over a four-year presidential term.Our domestic and global economic problems are deep-rooted and will take time to heal.As we have seen, the whole world is way too dependent on the United States for consumption.China and the rest of Asia have not fostered the growth of a capitalist middle class that provides self-sustaining demand.Europe’s population is aging to such a degree that most of its resources are tied-up trying to finance the retirement and healthcare needs of its citizens.Most of the resource-oriented economies which rely on oil production are kleptocracies that retard any real economic growth and depend solely on increases in commodity prices.
Once the US consumer slowed his or her buying in response to weaker housing prices, the whole system started to crumble.The vast majority of households in this country were relying on increasing home and stock prices to fund their spending and future retirements.Simply put, Americans need to spend less and save more .As household debt levels are reduced, spending will decline and businesses will contract.There are no short-cuts to prevent the pain that is ensuing from this phenomenon.
Housing prices still need to fall and any efforts to prevent this clearing of inventories will only lengthen an economic recovery.Giving money to GM and Ford or forcing mergers between these companies will not solve anything.Globally, there are too many automotive manufacturers producing too many cars for the public.The consumer has voted with his wallet for Toyota and Honda over GM and Ford since the Japanese manufacturers produce better cars at lower prices.Finally, any stimulus needs to be structural since tax rebate checks only provide a short-term boost .The stimulus earlier in the year delayed the onset of the recession, but added heavily to the governmental debt burden.
The new administration can help by establishing clear and consistent policies and then letting the markets react once the rules in place are understood.However, our resources are limited due tothe massive debts that we have assumed as a country and there is no silver bullet which will solve all of our problems.