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Comment on this article What Now? Four
Essentials If by January 20 the U.S. credit markets are still not functioning freely, President Obama should order a reexamination of the methods used by the prior administration, modify where appropriate, and then accelerate efforts to "unfreeze" those markets. The new administration should make public the terms and conditions of the loans and grants the government has made to financial and other entities, report on the conformity to date to those terms, and, if necessary, effect terms on any further aid that reflect the conditions to be set by the Obama administration. In addition to mandates on any new government support, there should also be a clear understanding that when the economy returns to health, the government will ease itself out of the role of providing stimulus and federal investment. The U.S. government should not remain a shareholder in U.S. industry beyond the time it is absolutely necessary. Concurrently, the administration must undertake carefully structured measures to address the housing situation. The economy will not turn around until effective measures are undertaken. A first step would be to identify people who are on the brink of losing their homes and do what should have been done originally, before they were approved for mortgages they couldn’t afford: assess their ability to pay. For the sake of the economy as a whole, we need to keep more of these people in their houses. For instance, a 30-year government-guaranteed mortgage could be granted to those who are creditworthy, at rates that are affordable given their incomes. Clearly, any house bought with excess credit will be worth less today than it was when the homeowners bought it. That will leave a gap: the current value of the house will probably be less than the mortgage it carries. That gap represents a loss that should be shared between those responsible for it, that is, both the homeowners and the original lender. There are many ways of arranging this—a second mortgage, for instance—so that when the house is sold, hopefully in a better future market, the institution that assumed its share of the loss on the original mortgage has a chance to get some of its investment back on a sale. The crucial point is that both the institution that made the original unsound loan and the homeowners who signed it must swallow some of the resulting loss—the homeowners over the long term, by eventually sharing the ownership value in their home when it appreciates. Obama’s emphasis on infrastructure spending is well placed. The entire infrastructure area is in great need, and an effective infrastructure program is essential for creating jobs and fighting off a still-worse recession. But the projects must be carefully chosen. The more the administration can direct these funds toward forward-looking projects that will benefit the economy and the nation in the long run, the better. In the twentieth century, "infrastructure" was almost synonymous with "highways." That assumption is no longer valid. Our population has grown, and our highways are clogged to the point where commuting time and pollution are having negative effects on economic growth. We need to start sending our infrastructure dollars to advanced, efficient mass transportation and projects such as bullet trains. Our country has fallen behind Japan and Europe in this arena, and we need to catch up to be competitive. Other infrastructure spending must be subjected to equally rigorous criteria. Finally, President Obama, through use of the bully pulpit and efforts to encourage mutual cooperation, should seek to unite the world against terrorism. This is an issue as fundamental for the economy as it is for human safety and security. It is especially true now that the horror of the Mumbai attack has shown that it’s not just the Western world, but indeed the entire world, that is at risk from extremists. Hopefully President Obama will work to regain international good will for the United States and to draw the nations of the world together in a cooperative, collaborative campaign for protection and peace.
Don’t
Punish Wall Street The financial crisis began with subprime borrowers failing to pay their mortgages, and it will not be solved until we get to the root of this problem. President Obama needs to listen to the numerous economists who have offered plans to insure, buy, or renegotiate subprime mortgages, and decide on a strategy. But the president needs to avoid the temptation to overregulate and, in the process, kill capitalism. For the past three decades, financial innovation has been America’s competitive advantage. But markets and institutions are fickle, and they can shift overseas if care is not taken to maintain an environment in which they can thrive. Punishing Wall Street as the villain in the current crisis will weaken America in the long run. In its financial history, the United States has witnessed periods of dramatic change in the institutions of capitalism; one of these was the creation of giant mortgage agencies in the late twentieth century and a complex architecture of securitization in the early twenty-first century. This revolution in securitization seemingly provided unprecedented American access to credit for home ownership and social mobility, while at the same time sharing risks widely through the global economy. The failure of securitization was an institutional failure. Despite the best of intentions, our institutions, bank regulators, risk management tools, and compensation structures lagged the extraordinary innovations in the marketplace. My concern is that the valuable features of securitization—the widespread, democratic access to capital and the market-based technology for risk sharing—will be rejected. These are enduring innovations when placed in the right framework. In addition, President Obama needs to find a way to preserve American credit. A sterling reputation as a borrower gives us a low national cost of capital. In our haste to spend our way out of the current crisis, let us make sure we remain fiscally sound.
China Road The crisis we face is not focused only on America but is global in scope. Other nations are looking to America, which accounts for 25 percent of global GDP, not just to get its own house in order but also to lead an internationally coordinated effort towards recovery. President Obama must therefore perform a complex act of focusing at home and abroad at the same time. The most important ingredient in meeting this challenge is the U.S.-Chinese relationship. China holds almost $2 trillion in monetary reserves—by far the largest hoard of foreign exchange in the world—and its continued strong growth is critical to the health of all Asia and beyond. China is now America’s key creditor: its continued investment in U.S. securities and U.S. companies directly, not to mention its support of the dollar, are preconditions for America’s recovery. America’s ability to keep consuming Chinese products and its ability to maintain an open regime for foreign investment are also vital to the Middle Kingdom’s economic growth. Beyond all that, the United States and China together hold the keys to essential reforms of global financial institutions that must also do their part to hold up the world economy. The two most important structural adjustments in the global economy also involve the United States and China. America must transform itself from a nation of overconsumption to one where people produce more and save more. China’s savings rate is 60 percent of GDP, absurdly high for a nation that is still very poor on a per capita basis, and its trade surplus is much too high as well. It needs to spend and consume. Without these kinds of fundamental changes, the world economy will remain dangerously out of whack. President-elect Obama should focus on a new partnership with Beijing, born of mutual need, not just to save the world economy but to point it once again to a prosperous path. This is much easier said than done and will require sustained effort, the marshaling of America’s top diplomatic talent, and some very difficult compromises. Hopefully, the right preparations are under way.
Energy Matters The order of President-elect Obama’s announcements of his key cabinet nominees reveals his view of the most pressing matters facing the United States: the economy, national security, and energy/environmental issues. Others skillfully explain in these pages the importance of stabilizing our financial markets and ensuring our national security, so I will focus on energy issues—specifically the urgent need for the president-elect to formulate a comprehensive, coherent national energy policy. Establishing and executing a national energy policy is very much related to both our economic health and our national security, and it is of growing importance given the recent volatility of oil prices and ongoing concerns about climate change. We mustn’t let the recent drop in oil prices lull us into complacency. We need an energy policy that includes provisions for improving energy efficiency and conservation, expands domestic energy exploration and production, and develops a wide range of viable alternative energy sources—from greater use of nuclear power to wind, solar, and sustainable biofuels. In short, we need a concentrated national effort to develop and encourage the use of alternative ways to fuel our autos, our airplanes, and our buildings. One of the most important aspects of any energy policy is that it be comprehensive. To cite the aerospace industry as an example, we are simultaneously developing aircraft that are significantly more fuel-efficient than today’s fleet, partnering with other companies to improve the safety and efficiency of the global air traffic control system, and supporting ongoing efforts to develop biofuels based on nonfood crops to run our airplanes. At the same time, companies everywhere need to make sure their facilities are as energy-efficient as possible, because growth must be sustainable for the long haul. Any one of these items alone will not make a significant dent in our industry’s energy use and environmental impact, but adding together all the components of a comprehensive approach will bring tremendous benefits to our environment, the United States, and the world.
Democratize Finance The current proposals for a fiscal stimulus, particularly along the lines of infrastructure improvements, the various bailouts, and tax cuts for the middle class, are all fine and necessary short-run fixes. But this is the most ominous economic situation we’ve been in since the Great Depression, and I’m worried that we may be in for a profound drop in confidence that we’ll have trouble getting out of. We may need an even greater stimulus package, and for the long run, we need something more. We’re in the middle of a crisis for capitalism. People feel that our capitalist institutions have failed, and yet our recent prosperity has been brought about by these capitalist institutions. To provide the inspiration required to lift us out of this potential depression, President Obama must work to make these businesses better for all of us. I’d suggest that we need most of all to democratize finance. All segments of society, not just the wealthy, should have the benefit of sound financial principles. One way to do this is to improve the financial advice that people get by establishing a Financial Products Safety Commission. The new president also needs to work toward improving our retail financial products, mortgages in particular. The mortgage institutions aren’t working correctly if we have a huge rash of foreclosures. It’s time for government intervention to create a new kind of mortgage contract that protects homeowners. We also need to expand our risk markets—but make them less of a house of cards, which is today’s situation: if one institution fails, many others go down with it. If, for example, we could create markets for real estate risk that are really liquid and that show expected prices for real estate out, say, five to ten years, this would direct the economy and be a fundamental improvement over the current situation. But the biggest problem facing the country today is not the subprime crisis and the resulting economic fallout. Rather, it’s the growing inequality between rich and poor. That’s not the way I want this country to go, and I think most of us don’t as well. So I’d suggest that President Obama, who, after all, received an electoral mandate to reduce inequality, create a tax system indexed to inequality. The indexation scheme would automatically kick in if inequality gets worse. You wouldn’t necessarily be making the rich poorer, but you would be offsetting any increases, freezing the inequality at today’s level, and not letting the gap grow. Hunkering down for the long haul I was disappointed to read the recommendations to Obama of the "five economists and businesspeople." There was a sense that some tweaking of our economic policies along with a stimulus package would ultimately right the economic ship of state. This approach, however, would simply get us back to where we were before the sub-prime mortgage fiasco upset the house of cards which is the global financial system. In order for investors to be willing to plunk their hard-earned money down, they need confidence that it will be returned—plus an additional amount to justify the risk. That confidence has been lost because the people, the financial institutions, and the governments have all been sucked into the vortex of buying goodies they don’t need with money they don’t have. President Obama has already lost some credibility by ignoring the tax evasion of some of his political appointees and by not encouraging the Congress to use the same "restraint" he has called for of the paymasters of Wall Street. His diminished bully pulpit makes it more difficult, even if he were so inclined, to steer us all away from the now damaged concept that the market can correct itself to the benefit of all. When the second wave of mortgage defaults appears this summer, the president’s political capital, by then fully spent, will not be available to convince us that any suggestions coming from the administration will be valid. We must throttle back our expectations that stimulus packages will be anything but a burden to our grandchildren and instead hunker down for the long haul that includes the encouragement of saving instead of spending so that capital will be available from friendly sources.
Congress and the president In "Four Essentials," William H. Donaldson makes clear that he believes the president of the United States has the right and authority to do things aimed at improving the nation’s economy, renewing the nation’s infrastructure, and devising and implementing a new foreign policy. According to Article I of the Constitution of the United States, all of the acts Mr. Donaldson urges the new president to undertake involve powers vested in the Congress, not in the president. The president’s role as the nation’s chief executive officer is to implement those powers of the Congress, not to usurp them. Those who believe any president has the influence to persuade the Congress to enact legislation the president wants should read the history of the "Rubber Stamp Congress," composed chiefly of Democrats, which was requested by President Roosevelt in 1936 to pass legislation increasing the number of U.S. Supreme Court justices. The Congress utterly rejected the president’s request, and Democratic leaders in both houses led the revolt. In 2007, it was difficult to find a reputable media commentator who did not believe that the Congress would enact immigration law "reforms." After all, the president wanted it, the congressional leadership wanted it, most Democrats in both houses wanted it, many Republicans in both houses wanted it, and the respected public opinion polls were reporting that the American people wanted it. But when the last session of the 110th Congress was gaveled to adjournment in December 2008, the Congress had not enacted meaningful immigration law "reforms.” The American people should pay heed to what they were taught in the 4th grade of every elementary school in the United States: We have a tripartite government. Only the Congress passes our laws. The president sees to the execution of the laws enacted by the Congress. And the courts resolve all disputes between the Congress, the president, and the people. To have it otherwise is to risk tyranny.
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