- The Washington Times - Wednesday, November 12, 2008




Some observers say President-elect Barack Obama’s options will be severely limited on taking office by the current difficulties in the U.S. economy and the vast financial commitment made to ease them. But a veteran senior Republican officeholder urges the incoming Democratic president to forge ahead with his own program, saying this determination in the face of adverse conditions will itself assist the recovery.

However, this Republican “old hand” also sounded a note of caution about the current degree of government intervention in the credit market and talk about additional troop commitments to Afghanistan.

George P. Shultz, distinguished fellow at Stanford University’s Hoover Institution and former secretary of state, secretary of the Treasury and secretary of labor (and an economist and former business executive) says Mr. Obama should make an early major address to the American people, spelling out his program and how the current economic bind will be eased.

He said Mr. Obama should design his programs as he wants them - for instance, in the area of a national health-care program. He said he finds an interesting synergy exists between problems. “Solving one problem will help make the others more solvable. The real problem [arises from] staking out new actions every day.”

Mr. Shultz said the Obama speech should address the problem created by the United States importing more than it exports, Mr. Shultz said: “We don’t save enough to finance our investments. The federal budget needs ultimately to be brought back into balance, and then the trade balance will fall back into better shape and we’ll be paying of our own investments.” Mr. Obama also should address the emerging problems of Social Security and other entitlement programs and the issue of energy import dependence, he said. “We should not lose sight of this just because the price of oil comes down.”

He noted that when he was Treasury secretary in the Nixon administration, the energy crisis of the early 1970s landed on his desk, since there was then no Energy Department. He said many people approached him with economically unworkable schemes but that “there now are real workable energy alternatives” that the United States can turn to in the areas of energy conservation and substitutions.

Mr. Shultz, secretary of state in the Reagan administration, questioned the strategy of planning on a large-scale reinvolvement in Afghanistan even if the incoming Democratic president inherits or achieves a viable agreement with the Iraqi government to allow a U.S. drawdown in Iraq.

The prospect of deeper commitment to Afghanistan “raises some big questions. We should think much more carefully about putting more troops in there. We succeeded pretty well initially in 2001. Why? Because we made common cause with various tribes for whom the only common theme is the expulsion of foreigners, to deny al Qaeda the safe haven it previously enjoyed in Afghanistan.”

He said the United States needs to get back to the original mission - rooting out terrorists. He observed that there had been “all kind of positive developments” in that regard. “It looks like the Iraqis got fed up with al Qaeda influence.” After a large U.S. withdrawal, Mr. Shultz expects Iraq will have a somewhat more representative government than before our intervention but one headed by a strong central figure over a loose federal system.

“The key is the oil. There must some method developed to give everyone in Iraq a stake in securing steady oil production. Some people think that ultimately Iraq sits atop an oil field that could provide the equivalent of another Saudi Arabia.” The real difficulty is not a shortage of equipment to extract and market the oil but that the equipment, even if fully up to standard, “could be blown up at any time.”

He said there is a hunger on the part of many Iraqis for advanced technologies. A physician friend of his went to Iraq and worked with Iraqi surgeons and found they possess a great deal of medical talent but “have been isolated from medical advances.”

Mr. Shultz said the approach of a new administration is a “time to take a deep breath, and make a fresh start.” In the spirit of the loyal opposition, the GOP stalwart and supporter of John McCain said of the prospective Obama administration: “I wish them well. If they do well, then we all do well.”

He said the federal intervention in credit and banking markets “shouldn’t have been called a bailout, but a workout.” He said the Federal Reserve “can produce liquidity but the problem is insolvency, Liquidity is kind of a blunt instrument to use in [addressing] insolvency.” (This insolvency arises from the lack of assets able to generate enough money to repay debts over time even if credit is available.)

The key problem is that the “value of assets underlying” the mortgage credit freeze-up “is uncertain and changing, and was leveraged to beat hell. There is a huge mass of uncertain value sitting there, making banks more hesitant to deal with each other.”

“Somehow,” he said, “financial wizards had figured out how to give houses away, resulting in a rise in demand and a resultant rise in prices.” These “so-called buyers, who were required to invest little or no down payment had no skin in the game.” When a person has committed his own money, “you pay more attention. Nobody ever washed a rented car.”

The Federal Reserve then provided easy money over a long period, when lenders and repackagers of mortgages were paid by their employers “on the basis of what they sold.”

Directing capital to the banks might help the credit market, but Mr. Shultz suggested it will not mend the damaged mortgage market. There remains the problem of assessing true value in the absence of a reliable and stable market valuation of the properties.

He said there should be a distinction between homebuyers who made down payments and those who did not. The latter, he suggested, might be more appropriately re-established as renters with an option to buy.

As a result of the government bailout, or buy-in, on these financing problems, a line formed to the rear of other companies and state and local governments seeking like treatment. Mr. Shultz observed that the case was made by General Motors and Chrysler that it would be easier to qualify for government assistance if the two U.S. auto concerns were to merge, and expressed satisfaction that thus far at least this particular gambit has not been favorably received.

Mr. Shultz told of the time he recommended that then-President Nixon stand back from intervening in a Gulf Coast Longshoremen’s strike that former President Johnson had prevented in the name of national security. “The strike will produce a kerfuffle, but not a national emergency, and will create pressures on both parties to settle the dispute. Staying out will help the collective bargaining process to work,” he advised Nixon. The recommended policy of disengagement proved effective. “The president was not hanging his shingle out” as a recourse for all with financial woes.

The Nixon White House, because of conflicts of interest, also did not intervene directly in the Penn Central Railroad bankruptcy, the largest up to that time. Mr. Shultz said Federal Reserve Chairman Arthur Burns had feared the bankruptcy would lead to a severe and general economic crisis. Mr. Burns proclaimed the Fed would provide sufficient funds to prevent a panic. “In both cases, the problems were worked out with little and only temporary problems” for the broader economy, he said.

Benjamin P. Tyree is deputy editor of the Commentary pages of The Washington Times and is a media fellow at Stanford University’s Hoover Institution.

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