Mr Obama needs to change US economic policy quickly

Wall Street slumped by more than 5% on the back of Mr Obama’s victory. The morning after the great result, reality set in.

We need change in policy. We need the right sort of change.

Changing to a more protectionist stance would be damaging. Markets are now hoping there is one breath of life and hope left in the outgoing Bush Administration. They are looking to the incumbent to chair a successful G20 on November 15th, and to bring together a trade deal. Mr Obama’s rhetoric in this area has scared them.

Changing from the state borrowing too much to the state borrowing even more would also be unhelpful. Mr Obama seeks a targeted stimulus, but it will all have to be borrowed, on top of the huge borrowings the Bush regime has inaugurated to cover the expenditure on the banks, mortgage companies and AIG.

So what change do we need?

We need a government which understands you cannot solve a private sector debt crisis by turning it into a public sector debt crisis.
We need a government which ditches the Bush/Paulson plan. It is too expensive for the taxpayer, and not big enough to solve the banking problem.
We need an Administration which seeks to return nationalised financial companies to the private sector, whilst supplying enough liquidity and offering sufficient transitional guarantees to maintain confidence in the system.

Freed of the burden of carrying the financial sector with state equity and subsidy, then the President could cut taxes on the lower paid, to provide a needed stimulus to consumption. We are going to need more jobs worldwide. They have to come from individuals wanting to buy more goods and services. At the moment US families cannot afford them, as they are too much in debt, and new debt is too scarce to come by. If the US state could cut its own appetite for debt, it could leave US taxpayers with more of their own money, which would start to arrest the decline.

My worry about Mr Obama is not that he represents change, but that he will not implement major changes quickly enough. It is tough on him because he inherits a mess. It is now his mess, and the sooner he turns up at economic meetings and starts to assert himself the better. There is no time for partying and choosing the curtains. The very financial foundations of the house are being questioned, so it’s time for change, time to get rebuilding.

He should also quietly dump his idea of escalating the war in Afghanistan. The US needs to conserve her military strength, and concentrate on rebuilding her economic strength.

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5 Comments

  1. Tony Makara
    Posted November 6, 2008 at 11:44 am | Permalink

    America must act to rein in its savage trade deficits otherwise confidence in the Dollar will shrink, as the currency yo-yos between trying to balance the need for liquidity with the fear of imported inflation. America's great fear, that fuel will be priced in the Euro, will become a reality unless the problem of trade deficits is tackled. It was the Bush Administration's support for unfettered free-trade that has created these problems and has cost Americans jobs and ultimately cost McCain votes.

  2. Brian Tomkinson
    Posted November 6, 2008 at 12:04 pm | Permalink

    Extending your thoughts to actions we should take here, are you advocating tax cuts? I can see more benefit in stimulating demand this way than by cutting interest rates which currently have little if any benefit to borrowers but denude savers of income.

  3. Dr Dan H.
    Posted November 6, 2008 at 12:35 pm | Permalink

    As I see it, the roots of the US banking crisis (and the UK one too) were socialist policies of "inclusion". Effectively, the banks were forced by fair means and foul to offer cheap loans to people who hadn't got much chance of paying them back again, which saddled said banks with portfolios of rubbish debt. Necessity is the mother of invention, and bankers are nothing if not deviously clever, conniving little souls, so a plan to get shut of some of the bad debt by mixing bad and good debt into debt vehicles and selling it on was hatched.

    This worked as long as there was a credit boom; the bad loans didn't look bad, much as a house built on quicksand will stand as long as there's no weight load on it. As soon as a critical tipping point was reached, though, the banks' bad and good loan packages began to look dodgy, and people shied away from them, and a situation developed where no bank trusted any other bank since they were all playing the "Good loans and bad mixed up" game previously, and now assume they're all in the same perilous position.

    This is the heart of the matter: there are loan packages out there which nobody knows the trustworthiness of; nobody except the original packager (who isn't daft enough to let on) knows how much rot is present to how much solid gold. As a result, banks don't want to lend each other money since the bank they're lending money to might go bust at any point and topple them over too; for similar reasons they don't like lending to people or companies either.

    This is all profoundly alarming and the only quick way out is to get rid of the bad loans in the debt investment packages to improve the overall safety of said vehicles.

    Herein lies the fundamental flaw in your argument, and it is a killer. To improve loan quality, the only easy way is to foreclose on, and repossess the houses held by potential deadbeats, and to write off the losses. This needs to be done fairly brutally; it'll hurt, it'll be incredibly unpopular, but it is the only medicine that will work and end the crisis.

    Subsequently the Governments need to keep their sticky fingers out of the banking system and stop meddling with things that they do not understand (a rule all Governments should aspire to, at least) and most of all, leave dangerous things to experts and make it clear that if said experts want a bail-out, it will come only by the least favourable (to the victim) method possible.

    This, Mr Redwood, is what a Socialist government will absolutely not do. Socialist governments like to control things, even if they are utterly incompetent at it and haven't a clue what they're doing. Gordon Brown is doing this at present; the only way out of the current crisis is to let the housing market deflate and repossess the dodgiest mortgages forthwith to improve the creditworthiness of the banks, yet this muppet of a leader insists on trying to keep the housing market inflated and is putting obstacles in the way of repossession of houses.

    So, if you're expecting economic good sense out of a Socialist, you're going to be sadly disappointed.

  4. rose
    Posted November 6, 2008 at 1:58 pm | Permalink

    After the biggest triumph of hype over experience we have yet seen, it is good to have some thoughtful commentary at last.

    That is not to say Mr Obama may not turn out to be a good president of the USA, but he will need a lot of good advice. Two lawyers who showed themselves capable of seeking and heeding it in dire circumstances, were Geoffrey Howe and Ken Clarke. Those are the best sort of politicians, the mature ones who don't pretend to have all the answers themselves, and are humble enough, i.e. confident enough, to ask others who might. In so doing, they both left things better than they found them.

    The American Presidency is uniquely fitted to do that. Being in effect an eighteenth century constitutional monarchy, it can hire whomsoever it wants to help govern. Here the PM must mostly shuffle the pack he is dealt by the parliamentary democracy, balancing considerations of personal loyalty and self preservation. A mediocre cabinet may in theory be sacked, but it must still be replaced from amongst whence it came, and there is a limit to the number of one-off peers he may create to serve him from elsewhere.

    In making his appointments, will Mr Obama use his power carefully, or will he rush to impress the news-as-entertainment manufacturers?

  5. mikestallard
    Posted November 6, 2008 at 11:53 pm | Permalink

    Looking at all those millions of democrats in USA on TV yesterday and looking at the English newspapers this morning, there seems to be a lot of fervour aroused. I was reminded of the early days of Tony Blair and Lady Diana' funeral.
    Obama will be under enormous pressure to provide decent houses, decent wages and decent health care for all these happy, supportive people.
    Trouble is that, like Mr Brown, he just doesn't have the cash.
    For the sake of all the black people in the world, I really hope that he can resist this pressure and does not go forward, prove the white supremacists right and bankrupt the country.
    Without America, we are all in big trouble. I am afraid that real Democracy is a very tender flower, and I cannot see any other nation on earth fulfilling the role of being the fair, generous and rich Uncle Sam.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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