Barack Obama: Could he turn into a 'zombie president'?

OF ALL the promises he has made and the hope he has instilled in the people of the United States, Barack Obama knows that unless he can steer the financial sector away from turmoil, he will not be able to lead the nation down the road to utopia.

His administration's plan to rescue the country's ailing banking system and thaw frozen credit markets, the president believes, represents the best option to jump-start the economy and ready the US for the years ahead.

It is a bold and confident assertion regarding a vital issue. If he is not successful in filling the financial black hole, Mr Obama will find his work in Washington difficult to carry out – without an economy in recovery, public-spending plans and tax-cutting projects will be severely hamstrung, and he faces the realistic prospect of the financial crisis casting a shadow of paralysis over his entire term.

He could become the zombie president.

For a man only three weeks into his new tenure, who inherited an economic crisis as deep and dire as any since the Great Depression, it is perhaps unfair to direct criticism towards his proposals. But while the honeymoon period is not over, the murmurs of discontent are already being heard.

It began on Tuesday, when the US Treasury secretary, Timothy Geithner, set out plans to establish a public-private partnership (PPP) model to remove toxic assets from the balance sheets of beleaguered financial institutions. An unprecedented sum of up to $2 trillion (£1.4 trillion) would be devoted to the initiative, whereby banks would undergo "stress tests" similar to medical check-ups to determine their vulnerability. If deserving, they would then receive finances from the fund to underwrite private capital.

It was an announcement that the White House hoped would herald a U-turn for the financial sector, but, judging by the reaction to Mr Geithner's 30-minute speech, the silver bullet had missed its target.

With no detail of more government cash infusions for the most troubled banks, the US stock market fell on Tuesday, with the Dow Jones Industrial Average closing down 4.6 per cent.

Stock in Bank of America and Citigroup, institutions which have received two government bail-outs already, fell by 19 per cent and 17 per cent respectively. Despite a modest rebound on Wall Street yesterday, Europe's stock markets also saw only negligible rises, with the FTSE 100 closing up 0.5 per cent.

"It's fair to say that the latest version of the bail-out plan in the US was greeted with some disappointment, simply because there was a complete lack of detail, which was what investors were hoping for," said Richard Hunter, the head of UK equities at Hargreaves Lansdown.

"In drawing a line once and for all over toxic assets, the markets will be waiting for further detail from the US authorities."

Mr Hunter added that disappointed investors had been "going back to more risk-averse instruments, such as US treasuries and gold".

Philip S Dow, the managing director of equity strategy at RBC Wealth Management, said investors were eager for any insights into which banks might prevail and which might not survive. He said the plan did not help investors to answer that question and it skirted the reality that some banks might succumb.

"Somebody has to take some losses," he said. "The market is hungry for some kind of a plan with very specific steps to it, and what we got was nothing of the order."

Carl Lantz, a Credit Suisse strategist, said Mr Geithner had been "very vague", while Michelle Mayer, of Barclays Capital, said that, while sounding aggressive, his speech had a "disappointing" lack of detail.

Accusations of a lack of detail have been the main stick with which investors have beaten Mr Obama's administration. Many believe it will be forced, at least temporarily, to nationalise banks, a move that is "philosophically difficult to take" for the US government, according to one strategist.

Kevin Logan, a senior US economist at Dresdner Kleinwort, said: "They have a plan for a plan, but they don't really have a plan. The whole proposal is so vague as to create new uncertainty, and maybe the problem is really so bad that they haven't worked out how to solve it."

For their part, Mr Obama and Mr Geithner insisted they had set out only the "broad architecture" of the plans, with further details to be fleshed out in the coming weeks. "Wall Street, I think, is hoping for an easy out on this thing, and there is no easy out," the president warned.

Mr Geithner yesterday emphasised that recent history had shown that, unless a fiscal plan was set in stone and definite, it should not be unveiled.

"I did not want to compound the mistakes of the past 12 months by rushing out a plan," he said. "I will live with that disappointment, because it is better than the alternative."

Mr Geithner admitted that the original bail-out, which saw in excess of $200 billion simply invested in banks with few conditions, led to "public distrust", and he pointed out continued public support for the banking sector was a "privilege not a right".

Warning against rash decision-making and winning confidence, it seems, are the keys to reviving the financial sector, and may well be the saviours of the Obama presidency.

Dr Andrew Wroe, a lecturer in American politics at the University of Kent, told The Scotsman that it was too soon to place importance on the initial frosty reception to the bail-out plan. He said: "It seems to me that the fall in the Dow is irrational, in exactly the same way it was going up and up and up in the 1990s. Alan Greenspan talked about irrational exuberance. This seems to be the same, but in reverse.

"The Dow was responding to speculation, and tomorrow it could easily go up. Obama has only been in the White House for three weeks; it is far too soon to be making judgments about his success in rescuing the banks or otherwise, or whether this will have any bearing on his presidency."

Mr Obama himself has made clear it will take time for the financial sector to readjust. "Ultimately, what happens is going to depend on how the markets respond over the long term, not today or the next day, but a month from now, or two months from now," he said.

Dr Wroe added: "Obama is being very cautious. He's aware that, while it's not a long-term game, it's a medium-term one. He needs the economy to be responding in four years' time.

"The important issue is that will he be able to persuade Congress to do the things he wants to do? He is very constrained domestically and had to rely on Republican votes to push through his stimulus plan.

"Playing the game will be key, and he seems aware of how to do that. Richard Neustadt, a political scientist, said presidential power is the power to persuade other actors in the political system to do things that aren't necessarily in their own interests. The question we have to ask is will Obama be a good persuader? We don't know yet."

http://news.scotsman.com/world/Barack-Obama-Could-he-turn.4971789.jp