More Pain to Come Even if He's Perfect

[girl gone mad]

By Joseph Stiglitz
Sunday, November 9, 2008

This is one hell of a way to win.

Barack Obama owes his victory in large measure to the prospect of the longest and deepest economic downturn in a quarter-century and perhaps since the Great Depression. If he performs well, he could become a great president. If he flubs it, he could get the same reception as Jimmy Carter. In the crassest political terms, it was good luck to have the financial crisis hit so close to the election. But Obama's lucky streak will end in a hurry if he can't find a way out of this mess. He will also have to manage expectations: Even if he does everything perfectly, we probably won't turn the corner for 18 months, and the downturn could last far longer than that.

So some steps are obvious: assistance to homeowners and bankruptcy reform; extending unemployment insurance; and making up for the gap in state revenue. The United States also has an infrastructure deficit, not just a fiscal and trade deficit, which means that spending more on infrastructure (such as public transport and technology -- especially of the green variety) will stimulate the economy in the short term and help us be more competitive in the long run.

But then matters start to get trickier. The economy obviously needs a direct shot in the arm, but the 44th president needs to be careful about the design of the stimulus he proposes. That's because President Bush will bequeath him a national debt -- $10.5 trillion and rising -- that has almost doubled since he took office, even before you factor in the full costs of the financial bailout and the Medicare prescription benefit, as well as the price tag for providing for the hundreds of thousands of returning Iraq war veterans.

(snip)

The root of so many of our problems is the reeling financial sector. The plan cooked up by Bush and his Treasury secretary, Henry M. Paulson Jr., isn't likely to work, or work well enough. So Obama's team will have to wade in.

Already, the banks have been talking about using taxpayers' money for dividends, bonuses and acquiring other banks, rather than doing more lending, which was clearly what Congress had in mind for the $700 billion. U.S. taxpayers got a raw deal, compared to the terms won by other governments (such as Great Britain) or by the legendary investor Warren Buffett, who provided capital to the best capitalized investment bank, Paulson's own Goldman Sachs. Want further proof that Washington got a lousy deal? Look at how the markets reacted. The share prices of the bailed-out banks shot up, showing that investors expected net profits to rise substantially.

The U.S. financial sector, once the emblem of our economic success, has failed us. Financial markets are supposed to allocate capital and manage risk; instead, they squandered capital and created risk. Even more galling, the banks' chiefs raked in private rewards totally out of whack with what scant good they were doing for the wider society

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/06/AR2008110602997.html