The New Nation - Internet Edition

Hasnat Abdul Hye

All eyes are now riveted on Barack Obama, the President-elect and they do not belong to Americans only. People and governments around the world are anxiously waiting to see how the country with the largest economy of all addresses the severest economic crisis since the Great Depression in the1930s.

Arguably, Barack Obama faces a dilemma in that he does not have any executive power now and at the same time he cannot be seen as a mute witness to the financial catastrophe that has engulfed America and the rest of the world. At the minimum, people at home and abroad expect him to make such policy announcements as will restore confidence in the American and global economy. His wariness to distance himself from the rescue measures of President Bush is understandable. But in a crisis of the magnitude that has emerged, there cannot be too much of differences on ideological ground between the Democrats and the Republicans on what needs to be done in the short and the medium terms. Clearly, unfettered laissez faire cannot prevail under either of the two sides of the ideological divide. As government rescue measures and stimulus package, ranging from loans to purchase of assets, cover both financial institutions in the real economy, many of the shibboleths of free market will be thrown overboard. Strengthening of the regulatory regime over financial institutions and the market will also call for a more dominant role of the government. This will imply curbing of free market as it has been known to work so long and expansion of the role of the government in the economic life of people. The market economy model will not be abandoned as a result but its unbridled power would be held in check. The restraining of market with comprehensive rules and regulations will be necessary for two reasons. First, to prevent the recurrence of similar financial meltdown, spilling into the real economy, in future. Second, to allow the new policy measures to work out effectively.

Fortunately for Barack Obama, the role of the government in a crisis like the present one does not have to be re-invented. He has only to look back at the New Deal programme of Franklin Roosevelt which successfully addressed the Great Depression of 1930s. Many of the institutions, policies and programmes introduced then continued till the beginning of the Reagan era when conservative policy took over. It is now part of the folklore of government that free market under conservative governance runs the risk of going off the rails because of the unhindered pursuit of profit motive. The undoing of the Glass-Stegall Act that separated commercial banking from investment banks is one of the main causes for the financial meltdown and it took place under Republican watch. The lack of enforcement of the regulatory framework that allowed the crisis to build up also was the result of a faith in a self-correcting market. Under Republican Administration, since Ronald Reagan, the Wall Street and the government have worked as close partners, with leaders of the former assuming important positions in Administrations and vice-versa. FDR's New Deal was a sharp departure from this cosy relationship between government and the market.

Barack Obama will no doubt, take a leaf out of FDR's New Deal in regulating the financial market. In the present circumstances, there will also be need to take over partial ownership of some banks and manufacturing companies, like auto industries. This will bring about change in corporate governance, something that was not necessary under the New Deal in any significant way. The result will be greater transparency and accountability of the restructured corporate bodies. Even those companies that will not come to be owned partially by the government will be under pressure to adopt the same corporate culture. Both investor and consumer interest will be better served and protected as a result.

Following the example of New Deal, Barack Obama will have to take up a substantial fiscal stimulus package to kick-start the economy. The objective will be to increase the buying power of consumers and job creation. Already, the outline of a $600 billion stimulus package has been indicated by the President-elect. It is five times more than what he had in mind originally while campaigning as a candidate. Infrastructure development, renewable energy and other campaign promises will, no doubt, come under this package. Aided by middle class tax cuts, as promised during the campaign, consumer spending will increase, sustaining the recovery of the economy out of recession.

The problem facing Obama, however, is more complex and acute than the one FDR had to tackle. It is not only a crisis of financial meltdown, affecting financial institutions that has shaken the market. Simultaneously and as a result of the same, the real economy has also come under pressure. This is seen in the applications for a share of the rescue package by the icon of American industries, the auto manufacturers. This may be followed by application from others in the coming months. FDR did not have to face the double whammy of twin crisis to the same degree. All recessions and depressions taper off at the end, under their own momentum with the 'invisible hand' of market acting as the correcting mechanism. But this automatic process takes heavy toll on the economy and the public. No government can remain aloof and wait for the invisible hand to work out the 'magic of the market place'. The financial recovery and the stimulus package have proved to be effective in the past and it will be so in the present case also. The only imponderable is, how much damage will be done to the economy and what misery will be inflicted on the people before the government intervention policy and programmes bear fruit. To minimise the damage and suffering there must be an ideal and effective recovery plan. Barack Obama and his team's goal will be to adopt and implement that particular plan. This just cannot be wished and has to be worked out in detail. Obama may not have found it already, but he has put in place a team who will be able to advise him on one before long.