Wednesday, September 17, 2008

What the Crisis Will Mean for President Obama

The best thing I've read about the crisis is this FT column by Harvard prof and former IMF chief economist Ken Rogoff. Better that you read the whole thing rather than I try to summarize it for you. Rogoff thinks through where things are headed: more bailouts, which mean a huge jump in the national debt ($1-2 trillion, by his reckoning), which will constrain government spending and mean higher taxes, plus a strong incentive for the Fed to loosen up its grip on the reins of inflation. All of this means that the dollar will devalue, and he is puzzled why it hasn't already dropped in anticipation of this scenario playing out.

I think all of that's correct, and it means the next president will face highly constrained choices. At the same time, I've been wondering if the crisis sets the stage for Obama to be a transformative president in the mold of FDR. If the crisis gets to the point that many people feel it in their everyday lives--and I think it will--there will be demands for government to restore trust in the system and strengthen the frayed social safety net, e.g. through universal health care and modernized regulation like that Obama has called for repeatedly, most recently in yesterday's speech.

My worry is that Obama will step into the White House facing loud calls for the government to take a greater role but will find the crisis has left the nation's finances in tatters and without the resources to respond to those demands.

1 comment:

Alan said...

Obama's economic plan of education, infrastructure and health care is exactly what can move us past the housing meltdown and financial system debacle.

The consumer is, in Nouriel Roubini's words, "tapped out, debt burdened, saving less." But we live in a demand side world, so since we have to kiss consumer demand goodbye, there is no alternative for economic growth to growth in public goods.

Even the old line Clintonians like Larry Summers are coming around to infrastructure as economic stimulus. See his testimony last week at the House Budget Committee. Obama's $50 billion emergency assistance to states and immediate infrastructure spending is the way to go. There's a lot that needs to be done.

Rogoff is right to worry about taking on the books the failed investment decisions of the housing boom and toxic financial sector innovation. This is the avenue to Japanese style malaise.

The Fed, Treasury and every other analyst on Wall Street are wrong to expect housing to lead us out of this mess. It has to be the public goods we need.