By Julianna Goldman and Rich Miller
June 17 (Bloomberg) -- President Barack Obama offered stern words for Wall Street and a prediction of 10 percent U.S. unemployment even as he said the “engines” of an economic recovery have begun to turn.
“Wall Street seems to maybe have a shorter memory about how close we were to the abyss than I would have expected,” Obama said, referring to criticism of the government’s growing role in the economy and markets.
Obama, in an interview with Bloomberg News on the eve of the release of his plan to revamp financial-market regulation, voiced confidence the economy would recover soon, while warning that robust growth was needed if the U.S. is to rein in its budget deficit without raising taxes on most Americans.
“You’re starting to see the engines of the economy turn,” Obama said. Still, he said, “It’s going to take a long time” for a full-fledged recovery as households work off the debt accumulated during the real estate boom.
The jobless rate will continue to climb from its current 25-year high of 9.4 percent as employers are slow to take on new workers, the president said. “Jobs are a lagging indicator,” he said, while adding that he didn’t have “a crystal ball” to predict when unemployment will start to decline.
Praise for Bernanke
Obama, 47, gave high marks to Federal Reserve Chairman Ben S. Bernanke for his role in fighting the financial crisis. Bernanke “has done an extraordinary job under extraordinary circumstances,” the president said during the interview in the East Room of the White House. He declined to say whether he would nominate Bernanke, 55, for another four-year term when his tenure runs out in January.
Ahead of today’s regulatory announcement expected at 12:50 p.m. in Washington, Obama pledged to make the derivatives market, which he called a system of “enormous risk,” more transparent. He also said it is important for the U.S. to maintain fiscal discipline to ensure investors in China and around the world keep buying U.S. government debt.
“The No. 1 risk of the next crisis would be that the foreign lenders take a look at this situation and decide it’s too risky,” said Peter G. Peterson, senior chairman of Blackstone Group International Ltd.
While expressing confidence in the long-term prospects for the economy, the president stressed the necessity of making tough reforms, including overhauling the health-care system, to generate the growth needed to reduce the budget deficit.
Growth and Taxes
He left open the possibility he would have to raise taxes on most Americans to decrease the deficit if growth were too weak. He also indicated he might tax the most-expensive employer-provided benefits to help pay for his health-care revamp. Both would reverse pledges he made during the campaign.
“If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes,” Obama said. “If we’ve got anemic growth, if we don’t have a strategy for recovery without bubbles, which is essentially what we’ve had over the last couple of recovery cycles, then we’re going to continue to have problems.”
The president has repeatedly said he would keep his presidential campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.
During the campaign, Obama opposed taxing employer-provided health-care benefits, a proposal gaining traction among Senate Democrats to pay for a $1 trillion health-care plan.
He said he preferred other means of funding the legislation, including reducing itemized deductions for the wealthiest Americans and focusing on cutting health-care costs.
‘Vigorous Debate’
Still, he said, “Congress is having a vigorous debate on the Hill, and I don’t want to predetermine the best way to do this.”
“I’ve already put forward what I think is the best way, but let me see what comes out of the Hill,” Obama said.
Only five months into a presidency that inherited the worst financial meltdown since the 1930s, Obama’s self-described “extraordinary” actions to stem the crisis have reached a critical juncture. He will now be tested less on his crisis- management skills and more on the policies that have extended the government’s reach into private industry.
Obama is assuming ownership of his bank-bailout plan, $787 billion economic-stimulus package, auto-industry restructuring and proposals to revise financial-market regulations.
New Terrain
He is also navigating new terrain as a steward of some of the best-known corporations, from General Motors Corp. to Citigroup Inc., asserting the kind of control unseen since former president Harry Truman tried to force action on the steel industry in 1952.
Obama has set a goal by the end of this year to complete legislation to curb climate change as well as overhaul health care. On foreign policy, he is picking up where past presidents have failed -- to reignite an Israeli-Palestinian peace deal, as he confronts foreign policy crises from Iran to North Korea to Pakistan.
The president comes at these challenges with a 67 percent approval rating, putting him above former presidents George W. Bush and Bill Clinton at the same point in their presidencies, according to the latest Gallup polling.
In a sign of the high stakes, Obama stepped up his sales pitch. Yesterday’s series of interviews as well as a Rose Garden press conference on North Korea that also touched on Iran and his regulatory, economic and health-care proposals followed his June 15 address before the American Medical Association in Chicago and a June 11 Wisconsin town hall on health care.
Financial Regulations
The president today will announce his proposal for revamping financial regulation. Many of the changes must be approved by Congress, where jurisdictional and ideological clashes may shape the final legislation.
Crafted by Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers, the plan would put the Federal Reserve in charge of regulating companies whose collapse could damage the entire financial system. It would also create a new agency to oversee consumer financial products, such as mortgages and credit cards.
The proposal encompasses areas ranging from derivatives to executive pay to the mortgage-backed securities that helped fuel the housing boom and touch off the credit crisis.
“Derivatives are a huge potential risk to the system,” he said. “We are going to make sure that they have to register, that they are regulated, that you have clearinghouses.”
Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
Role in Economy
The president also said he would like the government to get out of the economy when it can.
“As soon as this economy has stabilized, we want the market to do what it does best, and that is produce jobs, invest,” he said.
He brushed aside concerns that the rise in Treasury bond yields would stifle an economic recovery by pushing up borrowing costs for homebuyers. The 10-year Treasury note yield has increased 0.57 percentage point since May 14.
Obama said Treasury yields are rising because investors have grown “more confident that we may have avoided the very worst scenarios” for the economy and are putting their money into investments with higher returns.
Skittish Investors
Still, he warned that long-term deficits would deter international investors, including China, which holds $767.9 billion of U.S. debt. China has already shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.
“There’s no doubt that, at some point, you know, whether it’s the Chinese, the Koreans, the Japanese, whoever else has been snatching up Treasuries are going to decide that this is too much of a risk,” Obama said.
The Standard & Poor’s 500 Index has gained 15 percent since Obama’s Jan. 20 inauguration, compared with a decline of 9.6 percent in the first five months of the Bush administration and an increase of 3 percent under Clinton. Corporate bonds have returned 11.5 percent, according to Merrill Lynch & Co. index data, and companies have sold about $680 billion of debt, a record pace, Bloomberg data show.
The president said his plan to re-regulate markets would include a “systemic regulator” to oversee the “entire financial system” and catch risky activity “before the crisis occurs.”
His toughest language was reserved for those on Wall Street who criticize his administration for putting too many restrictions on aid, including limits on executive compensation.
“When I hear some of the commentary that’s been creeping up about, “You know, it’s time for government to get out of the economy. And what’s the Obama administration doing?’ I have to try to remind them -- all we’re doing is cleaning up after the mess that was made,” Obama said.
To contact the reporters on this story: Julianna Goldman in Washington at o jgoldman6@bloomberg.net; Rich Miller in Washington rmiller28@bloomberg.net
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