The following paragraphs come from the latest newsletter by Nouriel Roubini’s RGE Monitor. The article provides an insightful look at the economic and other challenges facing the US’s 44th President.
The 2008 US Presidential election
was historic itself owing to the candidates’ profile. But the timing of
the elections as the US and global economy are in the midst of the
worst financial crisis and recession in
decades reminds us of the Great Depression era and the 1980s recession
when incoming Presidents Roosevelt and Reagan faced immense challenges
to cure the economy’s woes.
By the time Obama takes
his oath in January 2009, he will face an economy which is still in a
middle of a severe and prolonged recession where households will
continue to face unaffordable mortgage and other debt, declining value
of homes (that
financed their consumption all these years), risk of debt default or
foreclosure, tight access to credit with stringent borrowing
conditions, erosion of their retirement savings amid the bearish stock market, over a million lay-offs taking the unemployment rate to 7-8% and critical foreign policy challenges.
Therefore, immediate challenges for Obama will include cushioning the consumers (who
account for over two thirds of GDP) from the economic slowdown by means
of a large fiscal stimulus package and acting on a government
guaranteed mortgage modification program. In fact, he has already called for fiscal stimulus
in the form of grants for state and local governments, infrastructure
spending to create jobs, scrap tax on unemployment insurance, tax cuts
for lower income-groups and small businesses, tax credits for firms
that create jobs and government aid for the ailing auto industry. Some
of the tax cuts would be financed by taxing the windfall profits of oil
companies.
Part of his program
would allow households to draw up to $10,000 from retirement funds
during 2008-09 without any tax penalty. Obama also called for a
ninety-day moratorium on foreclosures, modification of bankruptcy laws,
a $10 bn foreclosure-prevention fund and 10% mortgage tax credit for
the middle-class. But more importantly he has emphasized preventing
taxpayer funded bailout of banks and giving golden parachutes to CEOs
of failing institutions.
He has also strongly endorsed greater financial sector oversight,
control and reporting with the creation of a financial market oversight
commission to oversee liquidity, capital and disclosure requirements
and plans to streamlining regulatory agencies to prevent overlap and
assign greater role to the Securities and Exchange Commission (SEC) to
prevent market manipulation and to the Federal Reserve to carry out
regulation.
The Democratic Congress will also influence on asset markets, business sentiment and financial sector regulation, as well as on the country’s energy policy and oil sector,
health insurance and pharma sector, tax incidence on high income-groups
and corporate sector, pre-conditions under trade talks and role of
labor unions.
Tax policy and fiscal deficit
Obama will face a swelling fiscal deficit
deficit which might be pushed over $1trillion in the next few years.
Mounting fiscal costs of the housing and financial sector bailout and
fiscal stimulus measures to sustain aggregate demand will impact the
budget while the downturn puts a dent in tax revenues.
