Can the Obama effect last? The US president-elect is so admired, engenders such high aspirations and is such a wellspring of hope that no one could meet these expectations. That’s bad news for financial markets.
Barack Obama is days away from entering the White House with more at stake than any president since Franklin Delano Roosevelt.
So far, markets are betting that he will succeed. The Standard & Poor’s 500 Index has rallied 12 per cent since November 20. And from 2.06 per cent on December 30, the yield on the 10-year US Treasury bond has risen to 2.20 per cent, suggesting the flight-to-safety trade has abated somewhat. Meanwhile, the dollar has advanced 9.7 per cent against the euro since mid-December.
The make-up of Obama’s economic team was leaked to the press on November 21 and formally revealed a few days later.
The group is impressive. Federal Reserve Bank of New York President Timothy Geithner was designated to be the new Treasury Secretary. Lawrence Summers, former Treasury Secretary in Bill Clinton’s administration, was tapped to head the National Economic Council, with the smart money betting he’ll take over the Federal Reserve in 2010. And Paul Volcker, a highly respected former Fed chairman, was named to head an economic advisory board.
Optimism surrounding the appointments was so high that the S&P 500 wracked up its biggest four-day rally since 1933.
The euphoria may be overdone.
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BANK LOBBYING
Vested interests in the financial community, lobbying by banks and other institutions, and congressional resistance might stymie the much-needed redesign of the US regulatory structure.
The Senate voted down a resolution that would have prevented the release of the second half of the $700 billion Troubled Asset Relief Program. At 52 to 42, though, it wasn’t a resounding victory and may suggest future Congressional resistance to bailout and stimulus legislation. Failure to approve release of the TARP funds would have a “negative” impact on markets, House Financial Service Committee Chairman Barney Frank said this week before the vote.
Foreign investors may balk at financing a US budget deficit that the Congressional Budget Office projects will grow to $1.2 trillion this year even without new spending being approved. Investors might conclude — many economists already have — that Obama’s plans for an additional $775 billion two-year stimulus program aren’t enough to resuscitate the economy.
CROSSFIRE
The proposed package was caught in crossfire last week between lawmakers favouring more outlays for social programs, conservatives opposed to increased spending and moderates concerned about growing deficits.
The president-elect’s popularity, like any head of state’s, will also be vulnerable to the demands of domestic constituencies such as labour unions, to scandals and infighting within his administration, and to foreign-policy setbacks.
New Mexico Governor Bill Richardson, nominated to be Commerce secretary, has already had to withdraw his name from consideration because of an investigation into a contract awarded to a company run by a political donor.
Potentially more damaging are revelations of Geithner’s past tax difficulties, which, even if he’s confirmed as Treasury Secretary, would leave him as damaged goods. The stock market plummeted 4 per cent at one point on January 14, after the issue became public.
‘PROFOUND IRRESPONSIBILITY’
In short, the pressures of office are such that no president can permanently escape alienating the politically powerful or antagonising sizeable segments of the population. Adapting from Abraham Lincoln, you can please some of the people all of the time, all of the people some of the time, but you can’t please all of the people all of the time.
Although he has begged off commenting on some issues, especially foreign affairs, saying the US has only one president at a time, Obama has moved forcefully in the financial and economic arena. He has mostly managed expectations deftly — regardless of the brouhaha over the proposed stimulus package — prodded Congress to act on his requests and made sure his predecessors and Wall Street carry the can for the country’s mess.
Obama last week blamed the economy’s troubles on “an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, DC.”
In another populist move, the new administration will direct the Treasury to limit executive pay, dividend payments and stock buybacks by financial institutions that get “exceptional assistance” from the TARP, Summers wrote to Congress leaders.
AGENT OF CHANGE
“There is a devastating economic crisis that will become more difficult to contain with time,” Obama said at a news conference last week. “Today, we face a world of unconventional challenges from the spread of stateless terrorist networks and weapons of mass destruction to the grave dangers posed by failed states and rogue regimes.”
A day earlier, he offered a bleak description of the US economy that was seemingly designed to push Congress to pass the stimulus package. Obama portrayed a country where the unemployment rate is accelerating, family income is falling and “a generation of potential and promise” may be lost without prompt Congressional action.
“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action,” he said. “If nothing is done, this recession could linger for years.”
As a candidate, Obama ran as an agent of change. If he is prevented from implementing that commitment, the market consequences will be severe. That’s the price of being regarded as a messiah, even if he never sought the epithet.