Obama’s economic challenges

By Martin Wolf

In electing Barack Hussein Obama to the presidency, the American people have chosen an intellectual, a prophet of unity and a man with a Black Kenyan father and a white American mother. They have, at the same time, rejected the politics of fear and division that did such damage to their country.

Every week, 50 of the world’s most influential economists discuss Martin Wolf’s articles on FT.com

I am one of billions of people who find themselves astonished and delighted by this event. But the election is just the beginning. Few presidents have confronted bigger challenges than Mr Obama. Among that number must be counted two of the greatest – Abraham Lincoln and Franklin Delano Roosevelt. Mr Obama regards himself their heir. The question is whether he can come close to their exalted level.

The new president’s agenda is daunting. His country’s power is also reduced. Indeed, it was never as great as those who spoke of the “unipolar moment” believed. But the US remains the world’s greatest power and only leader. It possesses unmatched assets. The presidency of George W. Bush was a lesson in how not to use them. The Obama presidency must now be the opposite.

Events will shape Mr Obama’s priorities. But one such event is already here: the world is entering a recession, possibly the worst since the second world war. Yet he must meet this challenge in ways that preserve what is among the greatest achievements of his predecessors: the open world economy. It was under FDR and Harry Truman, both Democrats, that the US started to lead the world away from the autarkic policies of the 1930s. The US must not now turn its back on the world it shaped. Yet it may do just that, without creative and radical reform, at home and abroad.

In the short term, there is no alternative to another massive fiscal boost, strongly supported by aggressive monetary policy. Forecasters have been downgrading their views of 2009, for both the US and the rest of the world, at an extremely rapid rate (see chart). Last week the International Monetary Fund reduced forecasts for world economic growth, at market exchange rates, in 2009 from the 1.9 per cent forecast as recently as October to a mere 1.1 per cent. The advanced economies are now forecast to shrink by 0.3 per cent.

A bigger US fiscal deficit would offset the rise in the desired financial surplus – the excess of income over spending – in the private sector at a time of recession. In the early 1980s, the private sector surplus reached 6 per cent of gross domestic product (see chart). But the US would also probably run a current account deficit of 4 per cent of GDP at high levels of employment. Since the private, foreign and government balances must sum to zero, the fiscal deficit may need to be as huge as 10 per cent of GDP.

Such vast fiscal deficits are only a temporary solution. So how might they end? In the US and other countries with highly indebted private sectors, such as the UK, a return to large private sector financial deficits would be highly undesirable, even if achievable. A vastly better outcome would be bigger savings and a reduction in current account deficits. Thus, the expansion in net exports that has recently been so vital for US growth must continue (see chart).

If the US external correction is to be consistent with global growth, demand must expand vigorously elsewhere, particularly in chronic surplus countries. The new administration should lead the world towards an understanding of a point that concerned John Maynard Keynes: it is hard to accommodate countries with massive and persistent current account surpluses. The counterpart deficits, if prolonged, almost always lead to financial crises. The way out is for most surplus countries to spend more at home. The expansion programme announced by the Chinese government early this week is just a beginning. Instead of toying with protection, the Obama administration needs to focus on global imbalances. The immediate way to deal with this challenge is to demand a global fiscal stimulus, with surplus countries implementing the biggest packages.

The third element in the programme to deal with the current crisis is already under way – financing of emerging economies in difficulty. The Federal Reserve has taken the lead with its imaginative expansion of swap arrangements with central banks in a few emerging economies. But this needs to be generalised. What is needed is a much expanded version of the general agreement to borrow, through which countries provide credit to the IMF for on-lending.

Mr Obama’s legacy must be much more than crisis management, important though that is. He must also secure deeper reforms. He is right in his belief that a better safety net – universal healthcare, more generous unemployment insurance and greater support for those on low wages – is a necessary condition for acceptance of the changes brought about by global competition. That, not subsidies for failed behemoths, such as General Motors, is the way to proceed.

This means a willingness to accept that the US will need to raise its average tax level from what is, by the standards of high-income countries, a very low level. Mr Obama should start with taxation of energy: a higher price of fossil fuels is a necessary condition for plans to promote energy efficiency, reduce dependence on imports and lower carbon emissions. Personally, I believe it is time for the US to contemplate a national value added tax rather than rely so heavily on the income tax.

Just as important as these domestic reforms will be US engagement in global discussions. A huge area is climate change – a subject for a subsequent column. Another is reform of the IMF. But, to my mind, the most immediate challenge is what to do about financial regulation. The big lesson of this crisis is that policymakers did not understand what they were doing during the era of deregulation. Rather than re-regulate mindlessly, the right solution is to set up a high-level commission, charged with proposing reforms of financial structure and regulation at global and domestic levels. Mr Obama has even the obvious chairman of such a commission among his advisers: Paul Volcker, the highly respected former chairman of the Federal Reserve.

Mr Obama must, above all, build upon the achievements of his predecessors, rather than turn the US away from the world. He must push reforms that help the majority of Americans to gain from the rise of global competition. He must promote reforms abroad that will make the global economy work better. The crisis has given him a challenge and an opportunity. If he is to take the latter, he needs to become one of his country’s great presidents. Anything less would be a failure neither the US nor the world can now afford.

Frank's Plan Gives GM, Ford, Chrysler $25 Billion (Update1)

Nov. 12 (Bloomberg) -- General Motors Corp., Ford Motor Co. and Chrysler LLC would get $25 billion in additional aid from the Treasury's financial-rescue plan under a proposal by House Financial Services Committee Chairman Barney Frank.

Legislation is needed to authorize the Treasury to use part of its $700 billion rescue fund for the auto industry, Frank said today. He scheduled a hearing on the measure for Nov. 19.

``The consequences of a collapse of the American automobile industry would be particularly troublesome,'' Frank, a Massachusetts Democrat, told reporters in Washington.

Frank said the plan ``will be written in a way that we are protected'' and that ensures automakers cannot use the money ``imprudently.'' He said they were still working on details of the plan.

Frank's plan to move ahead with aid for automakers came as some lawmakers questioned whether the package was necessary or fair.

Representative Spencer Bachus of Alabama, the top Republican on Frank's committee, said a bailout would be unfair to competing car manufacturers and would only spur other industries to turn to lawmakers for financial assistance.

`Where Does This Stop?'

``Where does this stop?'' Bachus said. ``We started with financial services, we went from banks to insurance companies,'' he said. ``Does it end with manufacturing? What about retail?''

In addition to passing through the Democratic-controlled House, any legislation must be approved by the Senate, where the minority Republicans can stall legislation through endless debate. There, the top Republican on the Banking Committee, Senator Richard Shelby of Alabama, signaled that he opposes aid to automakers.

``The financial situation facing the Big Three is not a national problem, but their problem,'' Shelby said in a statement. ``I do not support the use of U.S. taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers in such a way that allows them to continue and compound their ongoing mistakes.''

House Speaker Nancy Pelosi said yesterday she wants ``immediate action'' to give automakers additional assistance as shares of General Motors Corp. yesterday hit their lowest level since 1943 and analysts say the company faces possible bankruptcy. President George W. Bush hasn't yet said he would approve any further aid to those companies.

GM, Ford, Rise

GM climbed 16 cents, or 5.5 percent, to $3.08 at 2 p.m. in New York Stock Exchange composite trading after yesterday's fall to a 65-year low. Ford rose 10 cents, or 5.6 percent, to $1.90.

Pelosi said any aid to the automakers would come with conditions, including restrictions on executive compensation, ``a prohibition on golden parachutes'' and ``rigorous independent oversight.'' Democratic lawmakers said today the aid should be contingent on the automakers restructuring the industry to be more competitive.

``We should consider giving $25 billion to save the industry but under certain restrictions,'' Paul Kanjorski, a Pennsylvania Democrat and top member of the House Financial Service Committee, told reporters. ``We have to make sure that we're not just going to throw it down a rat hole, that we're going to have a competitive world industry coming out of it.''

Massachusetts Democrat Representative Stephen Lynch said any aid has to ensure taxpayers will recoup that money at some point in the future, and that lawmakers should require the industry to build more fuel efficient cars.

``There needs to be incentives like that to force them to change the way they do business,'' Lynch said.

Paulson Shifts Focus of Rescue to Consumer Lending (Update4)

Nov. 12 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said today in a speech at the Treasury in Washington. ``This is creating a heavy burden on the American people and reducing the number of jobs in our economy.''

Paulson's remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn't delivered what was promised. Paulson sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets, and he may encounter resistance from Congress for the remaining $350 billion after using most of the first half to buy bank stakes.

Lawmakers will ``put his feet to the fire,'' said Kevin Petrasic, a former official at the Office of Thrift Supervision, now an attorney with the Paul, Hastings, Janofsky & Walker law firm in Washington. ``I'm not sure how you get around dealing with what is clearly the congressional intent.''

Paulson said he has no regrets for the revised plan. ``I will never apologize for changing a strategy or an approach if the facts change,'' he said.

Treasury and Federal Reserve officials are exploring a new ``facility'' to bolster the market for securities backed by assets, Paulson said, adding that the program would be ``significant in size.'' Officials are considering using a portion of the bailout money to ``encourage private investors to come back to this troubled market,'' he said.

Private Capital

The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital. Buying ``illiquid'' mortgage-related assets -- the reason the program was established a month ago -- is no longer being considered, he said.

``Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role,'' he said.

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers including General Motors Corp. Paulson is resisting.

Automakers' `Viability'

Automakers ``are a key part of our manufacturing industry and manufacturing is critical,'' Paulson said in response to a question after his prepared remarks. ``We need a solution, but the solution has got to be one that leads to viability.''

Paulson said he has no timeline for notifying Congress of his intent to use the remaining TARP funds, and reiterated that he's ``comfortable'' that $700 billion is ``what we need'' to stabilize the financial system.

With less than three months left in the Bush administration, demands for assistance from foundering companies will likely escalate. The Treasury two days ago took a $40 billion stake in AIG. American Express Co. this week converted into a bank-holding company, making it eligible for funds.

Democrat Barack Obama assumes the U.S. presidency on Jan. 20. Obama said last week his economic team will ``review the implementation'' of the rescue plan, suggesting he may have different priorities for its use. Paulson said today he met with a member of the incoming president's transition team as well as someone ``who is going to have responsibility'' for the program after the end of the Bush administration.

Schumer's Mixed Reaction

Some lawmakers are also calling for greater oversight over use of the funds. Senators Charles Schumer of New York and Robert Menendez of New Jersey last week wrote Paulson asking him to require banks accepting public capital to increase lending rather than use the money to finance takeovers. Neel Kashkari, the interim assistant secretary running the program, the same day rebuffed suggestions to ``micromanage'' lending decisions.

Schumer is scheduled to hold a press conference today to ``praise Paulson for finally recognizing the superiority of capital injections to asset purchases, but will also criticize Treasury's unwillingness to issue strict guidelines to ensure participating firms use the funds to increase lending,'' according to a press release.

Paulson's change in plans sent U.S. home-loan bonds without government backing down to new lows, credit default swap indexes suggest.

The ABX-HE-PENAAA 07-2 index of swaps tied to subprime-loan bonds rated AAA when created in the first half of 2007 dropped about 8 percent to a mid-price of 42, according to a note to clients today from Goldman Sachs Group Inc. The level suggests the bonds might fetch about 42 cents for each dollar of unpaid balances.

U.S. Stocks Fall on Best Buy Forecast, Treasury Strategy Shift

Nov. 12 (Bloomberg) -- U.S. stocks fell for a third day as Best Buy Co.'s warning of a ``seismic'' slowdown in spending and the Treasury's plan to use bailout funds to bolster consumer credit stoked concern the economic slump is deepening.

Best Buy, the largest electronics retailer, lost as much as 13 percent after saying profit will decrease in ``the most difficult climate we've ever seen.'' Occidental Petroleum Corp. dropped 7.7 percent as crude sank below $57 a barrel, while American Express Co. tumbled 9.2 percent on a report the company may need government aid. The Standard & Poor's 500 Financials Index slid to a 12-year low as the Treasury scrapped plans to buy mortgage assets and shifted focus to consumer credit.

``It's hard to get away from the drumbeat of negatives,'' said Liam Dalton, who oversees $1.3 billion as New York-based chief executive officer of Axiom Capital Management. Best Buy's forecast cut is ``a further sign of the retrenchment of the consumer and spending that's slowing very, very rapidly across the board.''

The S&P 500 fell 3.7 percent to 866.07 at 2:25 p.m. in New York. The Dow Jones Industrial Average retreated 280.6 points, or 3.2 percent, to 8,413.36. The Nasdaq Composite Index lost 3.9 percent to 1,519.26. About 11 stocks fell for each that rose on the New York Stock Exchange.

Economic Concern

The S&P 500's decline every day this week pared its rebound from a five-year closing low on Oct. 27 to less than 2 percent. The stock benchmark is down 44 percent from its October 2007 record after the economy contracted in two of the last four quarters and profits for companies in the index extended a yearlong slump.

President-elect Barack Obama may inherit the worst U.S. recession in three decades, according to economists surveyed by Bloomberg News, as more than $918 billion in credit losses drag on global growth.

Best Buy declined for a seventh day, losing $1.81 to $22.07. Profit for the year ending in February may be as low as $2.30 a share, the company said. Analysts projected $3.04, according to the average estimate in a Bloomberg survey.

Rival Circuit City Stores Inc. filed for bankruptcy protection on Nov. 10, while Macy's Inc., the second-biggest U.S. department-store chain, projected profit declines today.

Energy companies in the S&P 500 lost 5 percent as a group, while raw-material producers declined 4.5 percent collectively.

Oil sank as low as $56.13 a barrel in New York on forecasts that tomorrow's Energy Department report will show U.S. crude inventories grew last week amid decreased energy demand. Nickel, oil and gasoline led declines in the Reuters/Jefferies CRB Index of 19 raw materials.

Commodities Slump

Occidental Petroleum, the fourth-largest U.S. energy company, decreased $3.91 to $46.50. Exxon Mobil, the world's biggest, slipped 2.5 percent to $70.81.

AK Steel Holding Corp. fell 20 percent to $8.24. The fourth- largest U.S. steelmaker said it's temporarily idling operations at facilities in Ohio and Kentucky because of falling demand.

The Chicago Board Options Exchange Volatility Index climbed for a third straight day, adding 6.5 percent to 65.41. The so- called VIX measures the cost of using options as insurance against declines in the S&P 500.

The S&P 500 Financials Index slid 5.5 percent and dropped below its lowest closing level since 1996. The measure of banks, brokerages and asset managers has fallen 57 percent in 2008.

Treasury and Federal Reserve officials are exploring a new ``facility'' to bolster the market for securities backed by assets, Treasury Secretary Henry Paulson said. Officials are considering using a portion of the $700 billion financial bailout money to ``encourage private investors to come back to this troubled market,'' he said.

`Heavy Burden'

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said today in a speech at the Treasury in Washington. ``This is creating a heavy burden on the American people and reducing the number of jobs in our economy.''

Buying ``illiquid'' mortgage-related assets --the reason the Troubled Asset Relief Program was established a month ago -- is no longer being considered, he said.

Goldman Sachs Group Inc., Citigroup Inc. and Fifth Third Bancorp dropped more than 7 percent each.

American Express Co. slumped 8.8 percent to $20.43, the most in the Dow average. The credit-card company most dependent on capital markets for fundraising may have requested the government aid before it converted into a bank holding company two days ago, the Wall Street Journal reported, citing unidentified sources.

Morgan Stanley, which converted into a bank holding company in September, lost 8.7 percent to $12.85 after saying it will fire 10 percent of its institutional securities staff and 9 percent from asset-management.

GM, Ford

General Motors Corp. rallied 22 cents, or 7.5 percent, to $3.14. House Speaker Nancy Pelosi urged Congress to protect the country's carmaker from collapse. GM and Ford Motor Co. posted the two biggest gains in the S&P 500.

Congressional Democrats are telling President George W. Bush to back an economic stimulus package that would provide federal aid to state governments and boost spending on unemployment assistance, food stamps and infrastructure projects.

Confidence in the world economy stayed near rock-bottom in November as a global recession loomed, a survey of Bloomberg users on six continents showed. The Bloomberg Professional Global Confidence Index was at 6.6 compared with 4 in October, the lowest since the survey started a year ago. A reading below 50 means pessimists outnumber optimists.

Recession Prediction

``We basically see the U.S. remaining in a recession through the first half of the year,'' Binky Chadha, New York-based chief U.S. equity strategist at Deutsche Bank AG, said on Bloomberg Television. ``Earnings are probably not going to hit bottom until the economy hits bottom, and even then with a bit of a lag.''

Third-quarter earnings decreased 17 percent on average for S&P 500 companies that have reported results, according to Bloomberg data. Profits for 2008 will drop an average 8.5 percent and rise 12 percent next year, based on a survey of analysts' estimates.

Prologis, the world's largest warehouse developer, plunged 33 percent to $4.60 for the steepest decline in the S&P 500. The company cut its dividend and said it plans to halt new developments as the credit crisis worsens. Prologis Chief Executive Officer Jeffrey Schwartz resigned.

Qualcomm, Sprint

Qualcomm Inc. retreated 6.1 percent to $32.92. The biggest maker of mobile-phone chips has stopped hiring and is cutting some research projects after a ``dramatic'' contraction in chip orders from mobile-phone makers, Chief Executive Officer Paul Jacobs said.

Sprint Nextel Corp. slumped 23 percent to $1.95, the lowest since at least 1980. Merrill Lynch & Co. cut its forecast for shares of the third-largest U.S. mobile phone company by almost half to $3.10 on concern the slowing economy may stall a business rebound.

Google Inc. fell below $300 a share for the first time since 2005 after Citigroup Inc. analysts cut their profit estimates for the owner of the most popular Internet search engine and said online advertising growth will slow. The shares declined 4.9 percent to $296.24.

Technology spending worldwide will grow less than predicted next year as the financial crisis forces companies to trim budgets, IDC reported. Spending will rise 2.6 percent in 2009, down from an earlier estimate of 5.9 percent, the Framingham, Massachusetts-based research firm IDC said.

The S&P 500 Information Technology Index lost 4.1 percent.

Monetary Freedom and Its Opposite - Mark Thornton - Mises Institute

Tuesday, November 11, 2008

We don't want another Bretton Woods

By Irwin Stelzer

Representatives of some 20 nations are preparing to fly to Washington to erect a new architecture to house the world's financial system - "a new global order" was the description Gordon Brown used in Monday's speech at the Lord Mayor's banquet. To prepare for this meeting of the G20 industrialised and emerging nations, Europe's leaders gathered last week in Brussels and set down the principles they intend to have President Bush sign on to. And - get this - they gave America a 100-day deadline to agree to their plans. "We will be defending a common position, a vision… for reforming our financial system." My guess is that the American hosts are about as intimidated by this show of unity as the West's enemies were by the announcement of the formation of the European army.

France and Germany want the International Monetary Fund (IMF) to become a global supervisor of regulators; "the pivot of a renewed international system" is the blurry phrase used so as to minimise offence to the Americans.

Mr Brown has an even bolder agenda. He calls for "global governance"; wants the G20 to agree to a co-ordinated stimulus package; and wants the IMF to become an international monitor of the global economy, operating "an early warning system and a crisis prevention mechanism for the whole world".

Two problems. The first is that the IMF wants no part of such a job. Dominique Strauss Kahn, managing director of the IMF, told the Financial Times: "I don't think you can have a mechanical system with red lights and green lights and sometimes, country by country, the light goes from green to red."

The second is that economists are not very good at forecasting economic conditions. As Robert Samuelson points out in his new book, The Great Inflation and its Aftermath, economists have consistently made large and consequential errors when forecasting productivity, the non-inflationary level of employment, and other key variables. Throughout post-war history, "the consequences of these mistakes were devastating". When so accomplished a forecaster as former Fed chairman Alan Greenspan admits that he got it wrong, the anointing of an all-seeing international forecaster as a policy-maker does not automatically recommend itself.

It is, of course, impossible for Left-leaning economic planners who continue to lust after control, if not ownership, of the commanding heights of the economy, to admit such fallibility. After all, if you can't predict the consequences of a pet scheme, it is difficult to persuade voters that the scheme is in their interests.

None of this deters the EU team, which is determined to take this opportunity to substitute the European model of capitalism for the less heavily regulated American version - a long-time goal of the French and one of which Mr Brown is wary, lest the City be stifled by regulation, and Mr Sarkozy's beggar-thy-neighbour protectionism slip into the policy mix. As Mr Brown pointed out, such protectionism has in the past turned crises into deep recessions.

The new global order, those who have not studied history contend, is to be modelled on the Bretton Woods agreement of 1944. Never mind that the arrangements agreed depended heavily on some control of the international flow of capital, not feasible in today's globalised economy. Or that, as John Maynard Keynes, the architect of Bretton Woods, told the House of Lords, "We intend to retain control of our domestic rate of interest" - something that members of the euro zone have already forfeited and would like other nations, including Britain, to surrender in the interests of international co-ordination.

This is not to say that the meeting this weekend will be a complete waste of time. There is the intangible benefit of the creation of personal relationships that might contribute to future co-operation. Keynes's closing speech at Bretton Woods referred glowingly to "new friendships sealed and new intimacies formed". Then, too, there is the fact that the G8 industrialised nations have finally recognised, as the Prime Minister put it so succinctly, "We need more than the G8"; that it is important to include emerging economies in such jamborees, both to tap their huge currency reserves and to reduce grumbles about exclusion from the corridors of power.

But, in the end, this talking shop will reach no meaningful and binding decisions. The Bush Administration wants nothing to do with supranational regulatory authorities. Nor does the incoming Obama team have any intention of signing on to such a programme, either before it takes office or during the 100-day deadline that the EU has set.

Mr Bush is a gracious host, as the Obamas learnt when they visited the White House this week, and so will acquiesce in a pleasant but vacuous communiqué. But neither he nor, in all likelihood, his successor will want to replace the current quite flexible but more effective system of informal international co-ordination with a more rigid architecture.

And my guess is that John Maynard Keynes, surprised at the fact that there is a place from which he can look down on the proceedings, would endorse the scepticism of the American side. He least of all would want to see the world's leaders bound by "some academic scribbler of a few years back", even if he would be that scribbler.

The Reagan Counterrevolution
by Peter Schiff

In 1980, when the U.S. economy was last in serious trouble, Ronald Reagan offered the correct diagnoses that government was the problem and not the solution. His message resonated with voters, propelling him into the White House to implement an agenda of lowering marginal tax rates, reducing government spending and business regulations, restoring sound money, abolishing entire government departments, and basically allowing free market vibrancy to unshackle an economy burdened by big government. Though in practice much of the Reagan revolution never materialized, at least in theory his basic premise was sound.

In contrast, the country has now hitched its wagon to the views of Barack Obama. We don't know much about what he truly believes about economics, but the little that we do know is not encouraging. Obama has repeatedly heaped the blame for the current crisis on the excesses of unregulated capitalism and the greed of the wealthy. For him, the free market is the problem and government is the solution.

The President-elect has promised to cage the destructive forces of capitalism, impose more regulation, raise marginal tax rates, increase government spending, and restore prosperity by redistributing wealth from those who earned it to those considered to be more deserving. Like most of his generation, Obama believes that economic growth results from consumer spending, primarily from the middle class. Any policy that keeps the consumers headed to the mall will be promoted.

Unfortunately, while Reagan had a hard time getting his full agenda through Congress, Obama will likely be much more successful. The effort to concentrate more power in Washington will be far more appealing to Congress then Reagan's idea of restoring it to the people.

This sharp contrast in philosophy should not be taken lightly. Reagan looked to unleash the pent-up free market forces that had been smothered by a generation of Great Society reforms and uninterrupted Democratic control of Congress. Today, the public is looking for the Obama Administration to create the growth that the free market has apparently destroyed. The hope that our economy will grow as a result of government spending and micro-management is the most seminal shift in political philosophy since the New Deal.

Despite the absence of Reagan's promised spending cuts, the economy generally did well during his presidency (The growth would have been more genuine if the cuts had been delivered). However, Obama's policies will immediately make the current situation worse and the nation will suffer severely as a result. Rather than a sharp recession at the beginning of his term followed by a significant expansion, the recession that Obama inherits will be far worse when his first term ends.

What nearly all politicians, on both sides of the aisle, fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection. America's borrow and spend economy, and the bloated service sector that evolved around it, must be allowed to topple, so that a more sustainable economy grounded in savings and production can rise in its place. Any government efforts to delay the adjustment and spare us the pain will backfire, turning this recession into an inflationary depression.

Of broader concern however is the sharp turn in ideology, and what it means for the future of our nation. If this is a permanent shift, then America will lose any resemblance to the economic titan of the 20th Century. Our standard of living will decline sharply, our economy will be ravaged by inflation, tens of millions will be unemployed, more individual liberties will be surrendered, and rugged individualism will be supplanted by the nanny state. In short, Latin America may extend north to the Canadian border.

However, if this shift proves temporary and Obama's reign either ends in one term or if he can summon the intelligence and courage to reverse course once the situation deteriorates, then perhaps one day there will be light at the end of a very long tunnel.

While all of us can certainly hope for the best, prudence suggests that we had better prepare for the worst. Not only does that mean divesting our portfolios of U.S. dollar denominated investments but preparing for the possibility of emigration. With economic conditions at home becoming increasingly intolerable, the call of freer economies and greater prosperity abroad may be too tempting to resist.

Obama's Bailout Bunch Brings Us More of the Same: Jonathan Weil

Commentary by Jonathan Weil

Nov. 11 (Bloomberg) -- It's hard to believe Barack Obama would even think of calling this change.

Take a good look at some of the 17 people our nation's president-elect chose last week for his Transition Economic Advisory Board. And then try saying with a straight face that these are the leaders who should be advising him on how to navigate through the worst financial crisis in modern history.

First, there's former Treasury Secretary Robert Rubin. Not only was he chairman of Citigroup Inc.'s executive committee when the bank pushed bogus analyst research, helped Enron Corp. cook its books, and got caught baking its own. He was a director from 2000 to 2006 at Ford Motor Co., which also committed accounting fouls and now is begging Uncle Sam for Citigroup- style bailout cash.

Two other Citigroup directors received spots on the Obama board: Xerox Corp. Chief Executive Officer Anne Mulcahy and Time Warner Inc. Chairman Richard Parsons. Xerox and Time Warner got pinched years ago by the Securities and Exchange Commission for accounting frauds that occurred while Mulcahy and Parsons held lesser executive posts at their respective companies.

Mulcahy and Parsons also once were directors at Fannie Mae when that company was breaking accounting rules. So was another member of Obama's new economic board, former Commerce Secretary William Daley. He's now a member of the executive committee at JPMorgan Chase & Co., which, like Citigroup, is among the nine large banks that just got $125 billion of Treasury's bailout budget.

There's More

Obama's economic crew might as well be called the Bailout Bunch. Another slot went to former White House economic adviser Laura Tyson. She's been a director for about a decade at Morgan Stanley, which in 2004 got slapped for accounting violations by the SEC and a month ago got $10 billion from Treasury.

That's not all. There's Penny Pritzker, the Obama campaign's national finance chairwoman. She was on the board of the holding company for subprime lender Superior Bank FSB. The Chicago-area thrift, in which her family held a 50 percent stake, was seized by the Federal Deposit Insurance Corp. in 2001. The thrift's owners agreed to pay the government $460 million over 15 years to help cover the FDIC's losses.

Even some of the brighter lights on Obama's board, like Warren Buffett and former SEC Chairman William Donaldson, come with asterisks. Buffett was on the audit committee of Coca-Cola Co.'s board when the SEC found the soft-drink maker had misled investors about its earnings. Donaldson was on the audit committee from 1998 to 2001 at a provider of free e-mail services called Mail.com Inc. Just before he left the SEC, in 2005, the agency disciplined the company over accounting violations that had occurred on his watch.

Telling Stories

So, by my tally, almost half the people on Obama's economic advisory board have held fiduciary positions at companies that, to one degree or another, either fried their financial statements, helped send the world into an economic tailspin, or both. Do you think any of that came up in the vetting?

Let's say we give Buffett a pass -- smart move he made, skipping the group photo-op last week in Chicago. What about the rest of them? Donaldson, for one, was chairman when the SEC voted in 2004 to let the big Wall Street banks, including Lehman Brothers Holdings Inc. and Bear Stearns Cos., lever up their balance sheets like drunks. Talk about blowing it.

And whom did Obama tap for White House chief of staff? Rahm Emanuel, the Illinois congressman who was a director at Freddie Mac in 2000 and 2001 while it was committing accounting fraud.

Ideally, this job would go to someone who can't be easily fooled. Think about it: Of all the people Obama could have chosen as his chief of staff, couldn't he have found someone who wasn't once on the board of Freddie Mac?

Renewed Confidence

The president-elect needs some new advisers -- fast. We are in a crisis of confidence in American capitalism. These aren't the right people to re-instill its sense of honor.

Many of them should be getting subpoenas as material witnesses right about now, not places in Obama's inner circle. Did Obama learn nothing from the ill-fated choice of James Johnson, the former Fannie Mae boss, to lead his vice- presidential search committee?

Does he think people like Robert Rubin or Richard Parsons will offer any helpful advice on how to stop crooked bankers or sleep-walking directors from sinking our economy? Or that they won't mistake the nation's needs for their own corporate interests? Or that the people who helped get us into our long financial nightmare have any clue how to get us out?

Obama has created hope that our nation can stand for all that is good in the world again. It's not too late to change course.

Start by scrapping this board.

Japan's Economy Probably Barely Grew as Exports Waned (Update1)

Nov. 12 (Bloomberg) -- Japan's economy was probably at a standstill in the third quarter as a deepening global slowdown and weak demand at home edged the nation closer to its first recession in six years.

Gross domestic product rose an annualized 0.1 percent in the three months ended Sept. 30, economists predicted a Cabinet Office report will show Nov. 17. The world's second-largest economy contracted 3 percent in the previous quarter.

The slowdown that forced Prime Minister Taro Aso to delay elections may worsen as a global recession weakens exports, prompting companies to cut investment and hiring. Toyota Motor Corp. and Canon Inc. slashed profit forecasts in the past month as demand slows and a stronger yen erodes the value of sales.

``Marginally positive real GDP growth in the third quarter should probably be viewed as the calm before the storm,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Aso, whose approval ratings have tumbled since he took office in September, last month said the government will spend 5 trillion yen ($51 billion) to help households and small businesses weather the crisis. He indicated on Oct. 30 he would postpone the election until the global turmoil subsides.

The Bank of Japan last month cut its key interest rate to 0.3 percent, the first reduction in seven years. It said the global slowdown and the yen's advance against the dollar have created a ``severe'' earnings environment for Japanese companies.

Stock-Market Rout

The Nikkei 225 Stock Average plunged to a 26-year low last month and has lost 43 percent this year. It slid 0.3 percent as of the lunch break in Tokyo. The yen, which climbed to a 13-year high of 90.93 against the dollar on Oct. 24, traded at 97.78.

The International Monetary Fund last week cut its world growth forecast to 2.2 percent, below the 3 percent that it says is the equivalent to a global recession. The fund expects that the U.S., Europe and Japan will shrink next year, the first simultaneous contraction since World War II.

``We don't expect the economy to return to trend growth until the global economy shows positive signs of recovery -- no way,'' said Akira Maekawa, a senior economist at UBS AG in Tokyo. ``Until the global economy recovers Japan will have to deal with very slow, even though positive, growth rates.''

Net exports -- the difference between exports and imports - - probably failed to contribute to growth for a second quarter, robbing Japan of the engine that drove the nation's recovery from the 2001 recession, economist surveyed said.

Toyota Cuts

Toyota, which makes more than three-quarters of its sales abroad, forecast profit will fall this fiscal year by almost 70 percent. The carmaker will delay adding production capacity at a domestic plant that makes Lexus models, the Nikkei newspaper reported yesterday. The company will also lay off 3,000 workers by the end of March.

The ratio of jobs to applicants has fallen for eight months and the deteriorating profit outlook for companies is also putting pressure on wages. Winter bonuses, which typically account for about 10 percent of a fulltime worker's annual pay, will fall 2.9 percent this year, the Nikkei reported this week.

``You don't get a feel-good factor from that,'' said Jesper Koll, chief executive office at Tokyo-based hedge fund TRJ Tantallon Research Japan. Koll said he expects Japanese consumers, whose sentiment is already near the lowest level in more than 20 years, will become more frugal in coming months.

Domestic demand, which includes private consumption, business spending and housing investment, was probably flat for the quarter, economists predicted. A 2 percent drop in business spending canceled out a 3.6 percent increase in housing investment and a 0.1 percent gain in consumer spending.