The standard response from any U.S. president-elect about his policies prior to inauguration is that there is only one president at a time. That deference is designed to avoid undercutting the current officeholder, to keep from marginalizing him and prevent confusion about who is in charge. President-elect Barack Obama has tried to stick to that approach, particularly when it comes to foreign policy.
But the scale of the current economic crisis and the confusion that has surrounded the policy of the administration of President George W. Bush has forced Mr. Obama to lean forward and be more assertive. That is a good thing: Forceful U.S. action is essential to restore confidence and create a foundation for markets. The Bush administration appears to be increasing the level of confusion, the very last thing the world needs.
Since the subprime mortgage fiasco erupted and infected the U.S. financial system, the U.S. government has tried to stop the rot from spreading worldwide and into the “real” economy. Critical to the success of those efforts is a restoration of confidence: confidence among borrowers that they can get funds to do business, confidence among lenders that loans will be repaid, and confidence that governments and regulators understand the nature of the problem and will act to fix it.
Yet despite the U.S. government’s historic intervention into the markets, confidence remains in short supply. In fact, the crisis has worsened.
The U.S. government has failed to do the job. Much of the blame, incredibly, rests on the shoulders of U.S. Treasury Secretary Hank Paulson, a man who, as a former head of Goldman Sachs, should know how to ease market concerns. Yet his actions have been inconsistent and ineffectual.
First, Mr. Paulson won congressional authorization in July to support the mortgage companies Fannie Mae and Freddie Mac. Despite saying the aid would probably not be needed, less than two months later he reached into the Treasury’s pocket to provide those funds and take over those institutions. A week later, Mr. Paulson stood aside as the venerable U.S. investment bank Lehman Brothers went bankrupt. Only days later, the U.S. provided $85 billion to the financial giant AIG, saying its collapse posed a systemic risk to the financial system. Yet more money has since gone to the company.
Recognizing that ad hoc gestures would not suffice, Mr. Paulson developed a $700 billion plan — which, in its original draft, was just three pages long. Not surprisingly, few took it seriously. Extended negotiations with congressional leaders produced a hundred-plus page document that eventually won approval — after first being rejected by Congress, which many blamed on the White House’s failure to convey to lawmakers and their constituents the significance of the crisis.
That package provided a brief respite, but bank failures elsewhere and a downturn in the U.S. economy undid its good work. Markets have plunged and financial institutions continued to implode, while prices have dropped, and unemployment has climbed.
In response, Mr. Paulson reversed course again. Two weeks ago, he abandoned his original plan to use the bailout package — known as the Troubled Assets Relief Program (TARP) — to buy bad bank assets in favor of injecting capital directly into banks. After saying he would reserve about half the TARP funds for the next administration, “maintaining not only our flexibility, but that of the next administration,” he now wants to use those funds to bail out other institutions (Citigroup became the latest recipient of U.S. government support — just days after Mr. Paulson testified to Congress that “failure of a systemically relevant institution is no longer a pressing concern rattling the markets”) and to boost consumer credit. Confused? So are we.
Meanwhile, Mr. Bush has been missing in action. He appears to voice support for Mr. Paulson but merely makes bland statements in favor of open markets and a mantralike insistence that things will get better.
Leadership is needed, and Mr. Obama has been smart to jettison the traditional deference to the incumbent and step up. This week, he announced his economic team — a group of current and former officials in the White House and Federal Reserve — and said they would start working “today” to be ready upon inauguration Jan. 20, 2009. He has put together an economic advisory board to make sure that policies are smart and work. He said he backed the Bush administration’s actions and will honor its commitments, but more would be required. “These extraordinary stresses on our financial system require extraordinary policy responses.”
Mr. Obama pledged to provide a real jolt to the economy — “of a size and shape that is necessary to get the economy back on track” — that would save or create 2.5 million jobs. That will strain U.S. finances — already in parlous condition — but “we have to first focus on getting the economy back on track.” He promised to go through the budget line by line “to find meaningful cuts and sacrifices.”
But he has made clear that stimulus will take precedence over balancing the budget. Most important, he wants to have the package in place when he takes office. That is the kind of leadership the U.S. and the world needs now, with all due respect to the current White House occupant notwithstanding.
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