Commentary by Michael R. Sesit
Jan. 16 (Bloomberg) -- Can the Obama effect last?
The U.S. president-elect is so admired, engenders such high aspirations and is such a wellspring of hope that no one could meet these expectations. That’s bad news for financial markets.
Barack Obama is four days from entering the White House with more at stake than any president since Franklin Delano Roosevelt.
So far, markets are betting that he will succeed. The Standard & Poor’s 500 Index has rallied 12 percent since Nov. 20. And from 2.06 percent on Dec. 30, the yield on the 10-year U.S. Treasury bond has risen to 2.20 percent, suggesting the flight- to-safety trade has abated somewhat. Meanwhile, the dollar has advanced 9.7 percent against the euro since mid-December.
The make-up of Obama’s economic team was leaked to the press on Nov. 21 and formally revealed a few days later.
The group is impressive. Federal Reserve Bank of New York President Timothy Geithner was designated to be the new Treasury secretary. Lawrence Summers, former Treasury secretary in Bill Clinton’s administration, was tapped to head the National Economic Council, with the smart money betting he’ll take over the Federal Reserve in 2010. And Paul Volcker, a highly respected former Fed chairman, was named to head an economic advisory board.
Optimism surrounding the appointments was so high that the S&P 500 wracked up its biggest four-day rally since 1933.
The euphoria may be overdone.
Bank Lobbying
Vested interests in the financial community, lobbying by banks and other institutions, and congressional resistance might stymie the much-needed redesign of the U.S. regulatory structure.
Lawmakers, angered at the Bush administration’s handling of the first $350 billion of the $700 billion Troubled Asset Relief Program, might not approve release of the second half. Failure to do so would have a “negative” impact on markets, House Financial Service Committee Chairman Barney Frank said this week.
Foreign investors may balk at financing a U.S. budget deficit that the Congressional Budget Office projects will grow to $1.2 trillion this year even without new spending being approved. Investors might conclude -- many economists already have -- that Obama’s plans for an additional $775 billion two- year stimulus program aren’t enough to resuscitate the economy.
The proposed package was caught in crossfire last week between lawmakers favoring more outlays for social programs, conservatives opposed to increased spending and moderates concerned about growing deficits.
Scandals and Infighting
The president-elect’s popularity, like any head of state’s, will also be vulnerable to the demands of domestic constituencies such as labor unions, to scandals and infighting within his administration, and to foreign-policy setbacks.
New Mexico Governor Bill Richardson, nominated to be Commerce secretary, has already had to withdraw his name from consideration because of an investigation into a contract awarded to a company run by a political donor.
Potentially more damaging are revelations of Geithner’s past tax difficulties, which, even if he’s confirmed as Treasury secretary, would leave him as damaged goods. The stock market plummeted 4 percent at one point on Jan. 14, after the issue became public.
In short, the pressures of office are such that no president can permanently escape alienating the politically powerful or antagonizing sizable segments of the population. Adapting from Abraham Lincoln, you can please some of the people all of the time, all of the people some of the time, but you can’t please all of the people all of the time.
‘Profound Irresponsibility’
Although he has begged off commenting on some issues, especially foreign affairs, saying the U.S. has only one president at a time, Obama has moved forcefully in the financial and economic arena. He has mostly managed expectations deftly -- regardless of the brouhaha over the proposed stimulus package -- prodded Congress to act on his requests and made sure his predecessors and Wall Street carry the can for the country’s mess.
Obama last week blamed the economy’s troubles on “an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, D.C.”
In another populist move, the new administration will direct the Treasury to limit executive pay, dividend payments and stock buybacks by financial institutions that get “exceptional assistance” from the TARP, Summers wrote to Congress leaders.
“There is a devastating economic crisis that will become more difficult to contain with time,” Obama said at a news conference last week. “Today, we face a world of unconventional challenges from the spread of stateless terrorist networks and weapons of mass destruction to the grave dangers posed by failed states and rogue regimes.”
Agent of Change
A day earlier, he offered a bleak description of the U.S. economy that was seemingly designed to push Congress to pass the stimulus package. Obama portrayed a country where the unemployment rate is accelerating, family income is falling and “a generation of potential and promise” may be lost without prompt Congressional action.
“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action,” he said. “If nothing is done, this recession could linger for years.”
As a candidate, Obama ran as an agent of change. If he is prevented from implementing that commitment, the market consequences will be severe. That’s the price of being regarded as a messiah, even if he never sought the epithet.
(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Michael R. Sesit in Paris at at msesit@bloomberg.net
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