This is unprecedented. The Obama presidential transition is pushing forward actively while the outgoing Bush administration still has nearly two full months in office. The reason is obvious: Financial and economic distress could turn into panic unless President Bush and President-elect Obama, Treasury Secretary Hank Paulson, and Treasury Secretary-designate Tim Geithner are perceived as cooperating and if the new Obama team does not appear quickly to be taking hold. This is in dramatic contrast to previous transitions in which appointments and first-term decisions were unveiled a month or more later.
After January 20, things will be sorted out. Between now and then, though, federal money and loans will continue to be pumped into the system as necessary to maintain liquidity and to avert failures by cornerstone financial houses. Detroit auto executives will return to the capital next week with the "plan" requested by Congess as a condition of granting $25 billion in loans to the industry. After much grandstanding all around, the so-called plan probably will be given conditional acceptance and the money committed. Everyone knows the industry will burn most of the money for operating expenses but no wants responsibility for a failure of General Motors, Ford, or Chrysler early in 2009. If it does not happen next week, some variant of it will happen pronto in the new administration.
Meanwhile, it will be a gloomy holiday season for retailers. Consumers have lost equity in their homes, seen their retirement and other accounts lose value, and are properly nervous about events in the months ahead. Low-end retailers such as Wal-Mart should do OK. The yachts and diamonds crowd will keep on spending. But middle-range retailers, as with their customers, will be hard pressed. That explains all the pre-Christmas discount sales before Thanksgiving.
At the same time, financial markets are likely to remain volatile and unpredictable. Day-to-day events will continue to trigger swings of 300-400 points daily in the Dow Jones industrial average. The average is unlikely to hit 10,000 again in 2008. Offshore economies and financial markets also are worrisome. CDs and mattresses may appear for a time to be the only safe harbors for savers and investors.
Given all this bad news, let us pretend it is now January 21 and a President Obama and his economic team are fully in charge. What will they and ordinary Americans see? The public and private sectors will be awash in debt which will constrain both public and private initiatives during at least the next four years. An economic recession and relatively high unemployment (though not approximating the 30 percent unemployment during the Great Depression) will prevail. Unemployment is unlikely to reach 10 percent but it will be substantially above the 6 percent thought "normal."
Although the federal government has pumped money into the system, financial institutions nonetheless will be conservative in granting new credit. Credit-dependent business sectors will slow. Expansions will be deferred or cancelled. Work forces will be reduced. The housing correction will continue for at least a year, though perhaps not as sharply as over the past few months. State governments, which (except for Vermont) by statute must keep their budgets in balance, will be particularly hard hit. They do not have the luxury, as the federal government, of just printing cash to keep things running.
Bottom line: We do not face a replay of the Great Depression. But the new administration and the rest of us face what surely will be our largest financial/economic challenge since then. So what should be the Obama administration's first steps? Here are my best guesses:
First, liquidity will continue to be created as the financial system needs it. Business-sector rescues will be considered on a case-by-case basis, with "too big to fail" being the rule of thumb. Next, a short-term stimulus package will be enacted, with early emphasis on infrastructure spending (roads, bridges, water and electrical systems, public buildings) which will put money and jobs into local economies. Third, Obama's 2008 promises of trade protection will not be kept. Such steps led directly to the 1930s global crisis. Moreover, his principal economic appointees all lean to the free-trade side and will tell Obama that the campaign was then and governance is now. Finally, Obama's 2008 campaign promises will have to be pared back. Planning will begin on health care reform and greater energy efficiency, but formal legislative proposals are unlikely to be offered early in the new president's term. The same will be true of Social Security and Medicare reform, both long overdue. Bipartisan task forces no doubt will examine options for reform — they have been well known for a decade — but no formal fixes will be offered in 2009.
Many have observed that President Franklin Roosevelt's first months in office in 1933 were filled with fresh proposals, but they all dealt with one thing, the economic crisis. The landmark achievement of his first term, Social Security, was not enacted until 1935. So it will probably prove with Obama.
I have confidence in the financial/economic appointments Obama has made. Unlike prior such teams, they know each other and have worked together before. Critics have charged they are too conventional, have too many connections on Wall Street, and are unlikely to try daring departures. But stable and conventional are more than sufficient just now. What isn't needed is to frighten or upset the financial system, business community, international partners, or consumers.
Those calling for greater government activism might take stock of the steps already taken by the supposedly conservative Bush team and Fed Chair Ben Bernanke: They have injected the federal government more deeply into the financial system than any administration since FDR's, choosing those institutions which should survive and fail, and even taking equity positions in the survivors. When an auto bailout materializes, the federal government also could find itself part-owner of one or more companies in the industry.
Going forward, we also need to understand what caused the present mess. I would list these factors: Reckless behavior by financial-system leaders who burdened their institutions with perilous levels of debt, mostly related to the housing bubble. Careless oversight by federal regulatory agencies. Irresponsibility by both Democrats and Republicans in Congress who deepened federal deficits with can-you-top-this spending. They were equally irresponsible in encouraging unsound lending by both Fannie Mae and Freddie Mac, leading to their eventual government takeover. Banks, mortgage companies, and others who wrote mortgages for people who were not qualified to receive them and, then, sold them to other institutions which securitized and sold them domestically and internationally — spreading the contagion. And lastly, families and individuals who incurred mortgage and other debt they should not have assumed.
The big losers in all of this, of course, have been responsible, law-abiding citizens who have worked, avoided excessive debt, paid taxes, met their mortgage payments, saved for their kids' educations and their own retirements, and now are being asked to pay the tab for those who were irresponsible. They have every reason to be angry, in particular, with Master of Universe types on Wall Street who have walked away from their messes with personal fortunes and golden parachutes.
The greatest injustice probably is being visited on the Greatest and Depression-kid generations — those born before the boomer generation — who went through hard times and sacrifice only to find now that their retirement nest eggs have been sharply diminished by the boomers' recklessness. They are relatively few in number and thus lack political power.
President-elect Obama, a post-boomer, conducted himself professionally again in a Tuesday press conference dealing with economic and budget issues and appointments. He came across, once more, as measured, sensible, and, most importantly, confidence-inspiring. He has not yet issued calls for mutual, shared sacrifice. But those surely will come in his inaugural address, if not before.
Even when things were tough during the 1930s and the early days of World War II, President Roosevelt kept public confidence high in large part through his own leadership qualities. It is premature to attribute FDR-like leadership to Obama but, when I see and hear him, I am reminded both of FDR and of President Kennedy, who also represented generational change and who kept his promise to lift us out of an economic flat spot in 1961. Our new, young leader is earning our trust a full two months before taking office. Let us hope he is indeed the real thing.
