Obama's Economic Headwinds

by John M. Curtis
(310) 204-8700

Copyright March 12, 2008
All Rights Reserved.                    

                Pressing ahead with his economic program, President Barack Obama encountered some stiff headwinds on his plans to overhaul the nation’s health care system, help global warming, develop an alternative energy industry and improve public education.  While the economy reels from a fragile banking system and exploding budget deficits, Barack finds himself with a tough sell on less pressing priorities.  He’s tried to link the nation’s financial crisis to the strained health care system but it hasn’t gained much traction.  Leading economists have yet to connect the two, instead attributing today’s banking crisis to excessive speculation by banks in collateralized mortgage obligations known as “derivatives.”  Federal Reserve Chairman Ben S. Bernanke calls for an overhaul in the nation’s regulatory system that watched wild speculation vaporize $13 trillion in wealth since Dec. 2007.

            Calling the economy “more fragile and out future less secure,” Barack insisted the road back required investments in health care, global warming, education, renewable energy and education.  His $787 billion economic recovery program passed Feb. 14 with the help of only three Republicans, raised questions of whether or not future deficits would hamper a shaky economic recovery.  “Some of us have a real pause about the notion of putting substantially more money into the health care system when we’ve already got a bloated system,” said Budget Committee Chairman Sen. Kent Conrad (D-N.D.), worried that his proposed 10-year, $664 billion health care spending plan would grow already intolerable budget deficit.  Republicans in the House and Senate oppose Obama’s $3.55 trillion budget, expecting deficits to soar to $1.75 trillion, perhaps over $2 trillion.        

            Barack's Treasury Secretary Timothy Geithner has gotten mixed reviews for managing the financial mess.  Geithner has been long on rhetoric and short on details on his plan to retire toxic debt, dragging his feet on whether or not  to create a so-called “bad bank” in which to take toxic debt off banks’ balance sheets.  When Geithner’s predecessor former Treasury Secretary Hank Paulson and Fed Chairman Bernanke pushed to their $700 billion bailout plan last fall, there were high hope for thawing frozen credit markets.  $350 billion later, there’s little proof that banks have loosened their belts, extending credit to businesses and consumers.  Both Democrats and Republicans would like to see real improvements in credit markets and economic activity before pouring billions into the nation’s health care system.  Barack wants to go full steam ahead without the diesel fuel.

                Geithner told the Senate Budget Committee that he expected to allocate $1 trillion in new financing to shore up banks’ toxic debts.  He can’t say how, when and where the program would work itself into the economy but only that he had plans.  He wants to create a private-public partnership fund designed to shore up the bad assets, currently preventing banks from lending.  Geithner and Bernanke will have to decide on relaxing lending standards already so draconic that average borrowers can’t qualify for commercial credit or home loans.  While the stock market rose 500 point in the last three days to over 7,000, it’s not sustainable without improvements in the stock and real estate markets.  There can be no recovery until real estate and consumer credit markets reinstate prior lending practices.  No one can expect economic recovery when banks refuse to lend fresh capital.

            Obama knows there are a lot of moving parts to the current economic recovery program.  Pushing for more spending before the “bad bank” or some other vehicle for disposing of toxic assets has been spooking Wall Street.  Growing bigger deficits sabotages today’s efforts at fixing the economy.  Obama’s Director of the Office of Management and Budget Peter R. Orszag promised to cut the federal budget deficits in half by the end of Obama’s first term.  He bases his rosy projections on a growth rate of 4%, something unlikely unless markets are prone toward another asset bubble.  New York University economist Nouriel Rubini and billionaire investor Warren Buffet believe the economic recovery will be slow, characterized with fits-and-starts, advances and setbacks.  If Barack goes ahead with all his spending plans, there’s no end in sight to federal budget deficits.

              Barack faces resistance to his vast plans for overhauling the nation’s health care system, developing an alternative energy industry, helping global warming and fixing public education   All needed work but it would cost untold billions, adding to exploding budget deficits.  Democrats and Republicans alike wish to fix the nation’s financial markets before embarking on costly new programs that would add to deficits and threaten economic recovery.  While Wall Street showed some pulse over the last few days, it looks to the White House for guidance.  Talking about spending billions more on costly new programs before fixing the nation’s banking crisis gives markets more anxiety.  Obama must heed his calls in his Feb. 24 speech to a joint session of Congress to share in the collective sacrifice to fix the economy.  His own personal wish-list may have to wait awhile.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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