- The Washington Times - Wednesday, April 29, 2009

Only once in a generation does a new president confront a major economic crisis like the one President Obama faced when he took office.

And his response has been proportionate to the problem: record increases in spending aimed at spurring growth in his $787 billion stimulus bill and a $3.5 trillion budget plan, coupled with middle-class tax cuts and unprecedented efforts to resuscitate banks and failed credit markets.

Polls show most Americans hope the plans will succeed and give the president credit for trying, but many also are worried about the huge pileup of debt. Economists say the jury is still out on whether the response will succeed at reversing the worst economic downturn since World War II.

The financial markets swung wildly through Mr. Obama’s first 100 days, reacting sharply to his spate of proposals and to investors’ waxing and waning hopes for an economic recovery. Mr. Obama was greeted rudely on Inauguration Day with the biggest-ever drop in the Dow Jones Industrial Average for a new president, but then enjoyed a comeback in the Dow when investors applauded his bank-rescue plans two months later.

The “flurry of legislative activity” and other initiatives coming so quickly out of the White House buffeted the markets because of the unknown and potentially large consequences for the economy, said Jeffrey Kleintop, chief market strategist at LPL Financial. “The last time a president was inaugurated with similarly aggressive and wide-ranging stimulus [and bank rescue] plans - it was March 1933,” the beginning of Franklin Delano Roosevelt’s 12 years in office.

A record number of bills were passed in Roosevelt’s first 100 days, and the Depression-era president’s move to address an even more severe banking crisis in the 1930s by offering a first-ever federal guarantee on bank deposits helped spur an 80 percent surge in the stock market, Mr. Kleintop noted.

“It’s easy to get numb to all of this, to forget how much has happened so fast,” said Gerald Seib, assistant managing editor of the Wall Street Journal, comparing the first 100 days of the Obama presidency with the sweeping change brought by Ronald Reagan when he took office in 1981.

“It feels like Reagan on steroids,” Mr. Seib said, noting that the Republican president, responding to an economic crisis of comparable severity, did not secure passage of his signature tax cuts until August of his first year in office.

Mr. Obama secured enactment of his stimulus bill during his first month in office and later offered plans to help millions of homeowners facing foreclosures and to remedy a multitrillion-dollar problem with souring loans and losses at banks. Then, he moved to engineer the first-ever federal restructuring of automakers General Motors and Chrysler along with the broader auto industry, the backbone of the U.S. manufacturing sector.

The administration’s potentially radical idea of forcing GM and Chrysler into a quick, government-sponsored bankruptcy - after firing GM’s longtime chief executive, Richard Wagoner, last month - by itself would be a monumental step for any new president. Yet it seems like “almost a footnote” in light of the other big economic measures Mr. Obama has pushed through in his first few weeks in office, Mr. Seib said in a presentation to the Woodrow Wilson International Center for Scholars.

There is a danger that Mr. Obama may be trying to do too much at once - or at least more than the public and Congress can digest at one time - the Wall Street Journal editor said. While Americans support what he’s doing right now, by this fall “fatigue” may set in.

In particular, Mr. Seib is concerned that “the political will to finish the economic rescue will fizzle” and endanger Mr. Obama’s chance of securing the additional funding he is likely to need by this fall to finish cleaning up the toxic-loan problem at banks.

“A populist tiger” has been set loose against the bank rescue, spawned by rage against the excessive pay and perks of Wall Street executives, which threatens to thwart the administration’s efforts, he said.

Misgivings about Mr. Obama’s far-reaching agenda have rattled Wall Street markets from time to time, starting with a whopping 332-point drop in the Dow the day he took office, and punctuated by a 384-point drop in the Dow after his first attempt to address the banking crisis fell flat in early February.

Weeks of uncertainty racked the markets, which did not decidedly improve until the end of March, when the Treasury unveiled a more detailed plan to clean up banks’ toxic-loan problems, sparking a nearly 500-point surge in the Dow.

The stock market showed spurts of enthusiasm in January as Mr. Obama made plans for a giant stimulus bill. The largest such measure ever passed by Congress, the bill promised to restore or generate 3 million to 4 million jobs through a variety of funding for traditional road and bridge projects, schools, health care, “green” energy and technology programs and middle-class tax cuts.

But a more sober mood set in as economists warned that the tax cuts would dribble out slowly, large parts of the bill would only prop up spending by states and unemployed workers that otherwise would be lost to the recession, and much of the new spending would not be seen for months because of slow bureaucracies. Economists also estimated the plan would restore only 1 million to 2 million jobs - far less than the 5.3 million already lost to the recession.

With help still months away, the economy continued in free fall during the first four months of the year. Economists estimate it contracted at a 5 percent rate in the first quarter - only a smidgen better than the 6.3 percent drop in output seen in the final quarter of 2008.

Employers slashed jobs by nearly 600,000 a month in a bloodletting not seen in most Americans’ lifetimes. The dismal news forced Mr. Obama repeatedly to warn that 2009 would be largely a lost year for the economy, and a lasting recovery might not be seen until next year.

In a recent speech at Georgetown University, Mr. Obama emphasized that his goal is not just to spur growth immediately in the economy, but rather to foster long-term changes that will lay a foundation for more lasting gains by transforming the economy into a more productive one that relies less on debt and speculation.

While Mr. Obama’s stimulus program passed Congress quickly, his efforts to resuscitate the banking and credit markets were slowed in large part by fierce opposition to the bank-bailout program that began under the Bush administration. Forced to accept limited resources of less than $300 billion left in the bailout fund to address a multitrillion-dollar problem, the Treasury Department took weeks to develop a complicated yet sophisticated program seeking to draw in private resources to help restore the health of banks and credit markets.

After fits and starts, the plan announced in late March to clean up $1 trillion of souring loan assets on banks’ books through public-private investment funds helped provoke a modicum of optimism about troubled banking giants like Citicorp and Bank of America. The more upbeat mood also was fed by the record profits the banks reported during the first quarter, owing largely to a mortgage-refinancing boom and the help they got from the Treasury and Federal Reserve.

Beyond the banking and stimulus programs, Mr. Kleintop gives high marks to Mr. Obama’s efforts to beef up the resources of the International Monetary Fund to address the world financial crisis. The crisis that began in the United States with burgeoning defaults in subprime mortgages in 2007 by the time Mr. Obama took office had spread to every corner of the world. It fell on him not only to address the problems at home, but to try to lead efforts for an international response to the crisis.

But Mr. Obama has remained resolutely focused on trying to help Americans alarmed and stricken by the economic collapse. One of his first priorities was to use the bank-bailout fund to offer a $50 billion program to try to reduce home-loan defaults and foreclosures by promoting modifications of unaffordable loans by banks. Mr. Kleintop said the foreclosure program has the potential to help arrest a root economic problem: the free fall in the housing market, which has steadily added to a mountain of bad loans already weighing on banks and credit markets.

Economists and businessmen also give Mr. Obama credit for bringing on a top-caliber economic team led by veterans from previous administrations who have won the trust and confidence of financial markets. Those economic heavyweights include former Federal Reserve Chairman Paul Volcker as economic adviser, former Treasury Secretary Lawrence H. Summers to head the National Economic Council, and former New York Fed bank president Timothy F. Geithner to be Treasury secretary.

While Mr. Geithner in particular has been targeted by critics for his role as custodian of the bank-bailout program, economists and businessmen say the roster of familiar faces associated with more prosperous economic times in the 1980s and 1990s has been reassuring to markets amid the crisis.

At the same time, investors remain wary that the economy could be hurt by the potential for some destructive proposals touted by administration allies in the Democratic-led Congress, such as a “Buy America” provision added to the stimulus bill that marked a shift toward trade protectionism, Mr. Kleintop said.

Economists worry about a repeat of one of the biggest mistakes made during the Great Depression, when a move by Congress to protect domestic manufacturers by raising tariffs on imported goods led to tit-for-tat moves by other nations and worsened the global economic free fall.

Mr. Obama, who advocated more restrictive trade policies during his campaign, nevertheless relieved financial markets by emerging more recently as a free-trade defender. He moved to water down the “Buy America” provision to ensure it didn’t violate free-trade agreements the U.S. has signed, and so far also has fended off calls for retaliatory measures against China for artificially manipulating its currency to gain an advantage in trade.

Still, the “Buy America” incident served to illustrate “the uncertainty and potential for negative consequences as a result of new policy actions,” and that may weigh on the markets for some time, Mr. Kleintop said.

While most of the book on Mr. Obama’s presidency remains to be written, Michael Kazin, history professor at Georgetown University, said the flurry of major actions addressing the economic crisis in the first days of the new administration shows that Mr. Obama has the potential to be a “transformational” president like Mr. Reagan, FDR and even Abraham Lincoln.

“In each case, these were presidents who followed a president who was perceived widely to have been inept and self-defeating, the leader of a coalition in decline,” he said. “In each case, the president did move quickly. … They had to move quickly. They were elected because people wanted change.”

While Mr. Obama exudes confidence and clearly aims to make a mark with his ambitious agenda, whether he and his economic program succeed depends on “how much patience Americans have” to give the programs time to work, among other factors, Mr. Kazin said.

Many people compare Mr. Obama to Roosevelt, but he is unlike the Depression-era president in important ways, the history professor said. While Roosevelt was able to enact sweeping changes without much regard for what the rest of the world was doing because the economy in the 1930s was not as globalized, Mr. Obama does not have that luxury in today’s far more interconnected world economy.

“You can’t solve economic problems only in the United States today. It’s impossible. People know that,” Mr. Kazin said. “If China pulled all of its money out [of U.S. bonds], we’d be in a lot more trouble. [Mr. Obama] can’t do it himself,” and he has acknowledged as much in his early trips to engage allies in Canada, Europe, the Middle East and South America, and in dispatching Secretary of State Hillary Rodham Clinton to China.

Mr. Obama has gone out of his way to acknowledge the growing importance and influence of other power centers in the world, portraying his role - as leader of the largest economy and greatest military power - as one of cooperating and encouraging consensus among nations, rather than dictating terms to the rest of the world.

In the 21st century, “He in some ways is president of the world, but not really,” said Mr. Kazin. “There’s still a lot of sovereignty out there” that will make the task of coordinating global economic policies difficult.

One advantage Mr. Obama has is his mission to revive the economy should be easier than Roosevelt’s because he faces a less daunting economic challenge, Mr. Kazin said. Roosevelt was president at a time when one in four Americans were out of work, compared with less than one in 10 today, while many millions more were impoverished, hungry and homeless.

“Obama needs something besides getting the economy on a better footing,” Mr. Kazin said, suggesting that reform of the health care system will be “essential” to make a mark. “Every transformational president has a program he can point to: Roosevelt had Social Security, [President Lyndon] Johnson had anti-poverty and voting rights programs; Reagan had tax cuts and winning the Cold War.”

While Mr. Obama has hopes of turning the United States into a “green” and more just economy that spreads benefits to everyone and not just the rich, some critics on the right accuse him of being a socialist whose goal is to eliminate free markets and redistribute wealth.

They are wrong, Mr. Seib said.

“We’re talking about big government; we’re talking about activism and a lot more spending, but we’re not talking about socialism,” he said.

The best evidence that Mr. Obama is not planning a government takeover of the economy, Mr. Seib said, is his rejection of calls to nationalize foundering banks like Citigroup and Bank of America when they sought federal rescues earlier this year. Also, he has shown a preference for maintaining today’s hybrid system of government-private health care rather than nationalizing health care as favored by many liberal Democrats in Congress.

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