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Struggling economy leaves Obama no grace period
WASHINGTON — President-elect Barack Obama's preinaugural "honeymoon" could turn into a major headache.
Unlike those preceding him in office, Obama is being forced into swift action on the economy with a financial crisis and the specter of recession hanging over his head.
As he and his transition team move into consultations with the Treasury Department, the U.S. auto industry is openly lobbying for a bailout. Obama likely will name his Treasury secretary soon. And though he doesn't take office until Jan. 20, he will begin to consider whether to tap the $700 billion bank-rescue fund to help millions of Americans facing foreclosure to refinance their mortgages.
"The president is going to have his hands full, that's for sure," said Mark Vitner, an economist at Wachovia Bank.
On Wednesday, the volatile stock market gave Obama a rude greeting on his first day as president-elect, with the Dow Jones industrial average plunging 486 points. An ugly unemployment report awaits him on Friday.
To combat the recession, Democrats in Congress—with Obama's blessing—are pondering an economic stimulus plan during the lame-duck session of Congress. It would total about $100 billion to extend unemployment insurance benefits and boost funds for food stamps and state and local projects, said Rep. Steny Hoyer (D-Md.), the House majority leader.
But he said that may not happen if President George W. Bush threatens to veto it.
On top of that, there could be even larger stimulus bill early next year that could include Obama's middle-class tax cuts, as well as spending for infrastructure for the states and tax credits for home purchasers.
Alice Rivlin, a former congressional budget director, said the second bill should be ambitious and could include money for such projects as highways, broadband connections and high speed rail. "It would have to be carefully designed and not spent so quickly," she said.
For the moment, concern about the rising federal deficit is muted. Officials are trying to move quickly to stem a possible bout of 1930s-style deflation. The October jobs report could show the economy shed more than 250,000 jobs, said Nigel Gault, economist at Global Insight, a Boston consulting firm.
And yet, the rising deficit could limit the president-elect's ambitious plans for expanding health care, improving education and providing more renewable sources of energy. In his speech Tuesday night, Obama warned that he might not be able to get all his proposals put into effect in one term in office.
Leon Panetta, who served as chief of staff and budget director for President Bill Clinton, said that he would recommend that Obama scale back his ambitious agenda to keep the deficit in line.
Instead of a health-care plan, said Panetta, Obama should settle for a less costly plan to expand health care for needy children. To maintain trust with the American people, he said, "he's got to tell them what he can and cannot do."
The economic situation is so dire that Obama is expected to name his Treasury secretary quickly to assure Americans and financial markets that he is on the case. Usually the secretary of state is viewed as the most important Cabinet officer, but the prospect of hard times has elevated the Treasury job.
Names mentioned include Larry Summers, who headed the Treasury in the Clinton administration and headed Harvard University; Timothy Geithner, president of the Federal Reserve Bank of New York, who was deeply involved in bank bailouts; Jamie Dimon, JPMorgan Chase chief executive; Robert Rubin, who also headed Clinton's Treasury Department; Paul Volcker, former chairman of the Federal Reserve; and New Jersey Gov. Jon Corzine, a former Goldman-Sachs executive.
The Treasury Department, headed by former Wall Street executive Henry Paulson, has set up a transition team at the Treasury where Obama's team will work with the current administration on handling the crisis, a Treasury official said.
The Paulson Treasury is considering using some of the $700 billion to rescue non-financial corporations, and some are lining up for help.
Paulson replaced John Snow at the Treasury. Now Snow, chairman of Cerberus Capital Management LLC, which owns most of Chrysler, is lobbying the government to bail out the automobile industry. "The collapse of the auto industry at this time would be devastating for a new president," Snow told CNBC.
Another issue is how Paulson deploys the rest of the $700 billion. Initially, Congress approved the funds to permit the Treasury to buy mortgage-backed securities that no one wanted to buy. It is not clear if or when the Treasury will use the funds for this purpose. So far Paulson has targeted the money to buy equity stakes in banks, feeling that would provide a better incentive for them to lend.
Now that Paulson has chosen this route, Obama should not try to change it, said Rivlin, because such a move could upset the markets. Besides, said Vitner, the Treasury doesn't have enough money to buy all the troubled mortgage-backed securities.