Telegraph 06 Novembre 2008

The paralysing wait between the election of Franklin Roosevelt in 1932 and his inauguration four months later was the most dangerous point of the Great Depression. It saw policy drift in Washington and the era's last disastrous wave of bank failures.

This will not happen again. The interegnum has been reduced to two months. The campaign machinery of Barack Obama is the most disciplined in US political history. The transition is being run by John Podesta, a former White House chief of staff who remembers how the Clinton team squandered weeks in Little Rock before starting to assemble a government.

Mr Obama knows he has no such luxury in this fast-moving crisis. He takes over a country that is now losing almost half a million jobs a month, and may soon lose much of its car industry.

The budget deficit is likely to reach $1.2 trillion (£750bn) – or 8pc of GDP – when all the Bush bail-outs are totted up. So far foreigners are continuing to fund America's debt needs, although Taiwan has fired a warning shot by refusing to roll over holdings of Fannie Mae and Freddie Mac agency bonds. Any false step by Mr Obama that causes foreigners to withhold capital could quickly set off another round of this crisis.

As soon as next week the leaders of the G20 bloc gather in Washington to construct the new financial order, a revived Bretton Woods. The summit is a minefield, camouflaged with interegnum pieties. Bretton Woods means a fixed exchange-rate system, that is to say the antithesis of the floating currency regime that is so deeply linked, in so many subtle ways, to flourishing free markets.

Thankfully, Mr Obama is well advised – by Paul Volcker, Warren Buffett and George Soros – notwithstanding Rupert Murdoch's jibe that his economic plans are "rubbish".

His likely pick to replace Hank Paulson at the Treasury is Tim Geithner, the head of the New York Fed, the crisis fireman of the last year and perhaps America's safest pair of hands.

Whoever is chosen, we are about to see a strategic shift in US economic policy. Mr Obama's first stimulus package of $200bn will not be used to prop up middle-class spending. It will go on roads, bridges, ports, and the like, the start of a public works blitz to employ people and build things.

"Some 30pc of the 570,000 bridges in the US are unsafe," said Felix Rohatyn, former Lazard chief and now a Democrat elder, epitomised by the Minneapolis collapse in 2007. "We have a terrible infrastructure problem, which is unforgivable for the world's leading power. We have the potential for an economic relaunch similar to that of Roosevelt in the 1930s."

Companies will face tax penalties if they shun Mr Obama's scheme to extend health coverage to the 47m Americans without insurance. He means it: his mother spent the last months of her life dying from ovarian cancer struggling to pay for treatment. Moreover, the full might of a Democratic Congress stands behind him.

The president-elect is not a hard-core protectionist, although he tilted that way to survive the Democratic primaries against Hillary Clinton. He is a disciple of Professor Jagdish Baghwati, who thinks the Smoot-Hawley tariff act of 1930 caused the Wall Street crash to metastasize into a global slump.

Even so, things are going to change for America's trading partners. Europe's EADS will have a tough time under this Congress winning a share of the Pentagon's $35bn military tanker contracts. Countries that repress trade unions or breach eco rules will face the risk of tariffs.

Mr Obama has debts to the labour movement. He backs the Employee Free Choice Act, which eliminates the free ballot in union elections. "If enacted, it will bring about the most revolutionary change in the law governing union organising in the past 50 years," said Maurice Baskin, chair of Venable's employment group.

There are plans for a windfall tax on oil, stiff rises on fuel duty, and a $150bn fund to bring solar and wind power and green energy to the point of critical mass. He backs nuclear power, but new coal plants may not be viable under his swingeing carbon trading charges. The aim is to vastly reduce America's reliance on oil imports.

Taxes will go up as the Bush cuts expire in 2011, or before, hitting the rich with a triple whammy of higher rates on capital gains and dividends, and a surtax on incomes over $200,000.

Taken together, the Obama "manifesto" may prove as far-reaching as the Reagan revolution. The pendulum has swung back. At first glance it looks like a switch to European social democracy, but Washington's "permanent government" always finds a way of moderating change.

Mr Obama inherits an almighty mess. It is the result of pushing US domestic debt from 130pc of GDP to over 220pc in a half a century of rising leverage. This game has run its course. There will be a slow, painful purge over coming years.

By dint of lucky timing, however, he may take office just as the economy starts to carve a long bottom. The Fed's drastic rate cuts have greatly reduced the chance of calamity next year. There are glimmers of hope in US housing as the stock of unsold homes falls from 11 months' supply to 9.9. Libor lending rates have come down to a four-year low. The credit freeze is starting to thaw.

Nothing can prevent a deep recession, but Mr Obama will not be blamed. Indeed, he is perfectly placed to capture the political bonanza of recovery.

By Ambrose Evans-Pritchard

Source >  Telegraph | nov 06