That’s enough of the hype. Now new US President Barack Obama needs to roll up his sleeves and start getting on with the hard slog of saving the economy from the mess that has been made. At least in Europe, he couldn’t ask for a better start: Obama takes office on a tide of goodwill and optimism. Following George W. Bush is a bit like being the guy who took over from Timothy Dalton playing James Bond: it wasn’t really possible for things to get much worse. The new president now has an unprecedented opportunity. Few other leaders have come into office with such a powerful mandate.
In time, all that fervour will be a curse as much as a blessing. The trouble with raising people’s expectations to the roof is that there is a crushing sense of disappointment when you fail to live up to their hopes. For now, though, Obama has the chance to draw up a global financial system to replace one that has clearly failed. He’s going to get only one shot at it.
In 12 months’ time, he’ll be bogged down in domestic politics, messy wars in Iraq and Afghanistan, and in the inevitable scandals, rows and compromises that come with high office. For now, he has two of the most valuable assets any leader can have: a clean slate and a voice that commands instant attention. He should start by putting old ideological conflicts to rest; by creating new rules for the way banks lend and borrow; and by fixing the imbalances that caused the credit crunch. If he can complete all three of those tasks, he will rank as a great president. If he can complete just one, he will rank as pretty good.
Much of Obama’s energy will be devoted to fixing a broken banking system and to breathing life into an economy that has slumped into a recession. He has already announced a massive $850bn, two-year package of tax cuts and increased spending, which is the equivalent of about 3% of US gross domestic product over the two years. Maybe that will work, and maybe it won’t. No honest economist could say whether it will really be enough. At some point, the economy will recover. One thing is clear, though: The world won’t go back to the debt-fuelled, globalisation-crazy world of 2007.
“Unlike previous postwar contractions, the problem the global economy now faces does not primarily stem from a temporary mismatch between output and demand,” Stephen Lewis, chief economist at Monument Securities Ltd, said in a note to investors. “It arises, rather, from the breakdown of the financial system, and the process of wealth-destruction that has set in train.” The question now is how Obama can take the lead in fixing that. Here are three places he could start.
First, ditch ideological hang-ups. The debate on how to move on from the credit crunch is fast turning into trench warfare between the traditional advocates of big government and the die-hard supporters of the free market. That isn’t getting us anywhere. The free-market camp needs to recognise that there wasn’t enough supervision or regulation of the financial markets. We are going to need more rules.
Likewise, the big-government camp needs to understand that more spending and government meddling won’t fix much either. We don’t want to lose the growth, dynamism and opportunities that flowed from the free movement of money, ideas and people across borders. The path to be steered will have to lie somewhere between the two extremes.
Next, new rules on the way banks operate are needed. It is clear that the global banking system had ignored the risks building up over many years. The incentive systems had become perverse. New capital requirements will have to be devised for banks to stop excessive risk-taking. Institutions such as hedge funds and private-equity firms will have to be brought into the system – they play too big a role in the financial markets to be left unregulated. And the rules need to be global. There is no point in changes being made country-by-country. That way we lose all the benefits of globalisation.
Most importantly, the imbalances need to be fixed. Too much capital was being recycled through the global financial system. Some countries – China and Germany, for example – exported and saved too much. Others – the US and UK – imported and borrowed too much. That will have to be rectified. It is no good having one lot of countries telling everyone else to consume more unless they are also willing to consume less. That will hurt. But there is no way of avoiding it. Where the last president had a war on terror, this one needs a war on financial bubbles, and that requires a more balanced global economy.
Finally, don’t bother about the witch-hunt. It is tempting to blame the bankers and corporate executives who created the mess. Tempting, but wrong. They were mostly just people riding a train that ended up going off the rails: it’s more important to fix the rails than to start shouting at the passengers. It is a massive agenda. Yet if Obama can make even a start on it, he will justify the faith placed in him.