Dear 44: Your economic to-do list
The next president will inherit a high-stakes mess on Wall Street and Main Street. So he may need to push aside some proposals to put out fires.
NEW YORK (CNNMoney.com) -- Remember that job John McCain and Barack Obama applied for last year? Well, it's looking a lot different now.
In addition to the usual presidential undertakings, the person elected in November will have to contend with an unprecedented tangle of financial problems.
Let's review the headlines of the last seven months: economic downturn ... highest foreclosure rate in at least 30 years ... government takeover of mortgage giants Fannie and Freddie ... stubbornly high energy prices ... steep drops in stocks ... a burgeoning deficit ... and more taxpayer dollars at risk.
Not to mention a weaker greenback, low consumer confidence, a growing number of troubled and failed banks, a liquidity crisis for the country's largest insurer, and a financial tsunami that wiped out three of the five major investment banks, leaving in question just how Wall Street will work going forward.
Of course, one thing hasn't changed: The Oval Office is still oval.
In his book "A Call to Greatness: Challenging Our Next President," David Abshire said that the United States had lost some of its strategic, financial and budgetary "freedom of action" - an indication that the country could be heading for a crisis.
"Now things are much worse because back then the economy was in better shape," Abshire said in an interview.
The president-elect would do well to do two things starting Nov. 5, Abshire advised: reach out to the current administration and signal that he will work with Congress.
"There must be a bipartisan compact and the president-elect must send out unifying signals before the inauguration," said Abshire, who is president of the Center for the Study of the Presidency. "That transition is going to be absolutely key because the world's financial markets are holding their breath."
Also key is how the next president prioritizes his 2009 to-do list. That may mean ranking the new policy proposals he campaigned on below these list toppers:
Get to the bottom of housing: Democrats and Republicans may disagree on the solutions, but both acknowledge that the financial markets will continue to be hobbled until housing prices find their bottom.
A continued decline in prices and increase in foreclosures, along with anemic economic growth, could put pressure on the president to do something more to help troubled borrowers and the housing market. There may be calls for the government to start buying mortgages directly, for instance, said Robert Litan, director of economic studies at the Brookings Institution.
Whether further intervention will be needed also depends on how successful government efforts have been so far in boosting confidence in the financial markets and keeping to a minimum the number of financial institutions that fail, said Loyola University Chicago professor John Frendreis, coauthor of the book "The Presidency and Economic Policy."
Give the economy a boost: If economic growth continues to disappoint, the housing market doesn't improve and unemployment rises, the next president may need to inject a second round of stimulus into the economy. Democrats, including Sen. Obama, have been calling for one, but political observers don't expect anything to pass before 2009.
"The financial problems could strengthen both candidates' case for early tax relief," Litan said.
McCain has called for the extension of the 2001 and 2003 tax cuts, an increase in the dependent exemption and a reduction in the corporate tax rate. Obama wants to extend the tax cuts for everyone except the high-income taxpayers and has proposed a host of new tax cuts for low and middle income families.
But if the picture isn't prettier by January 2009, that may mean that Obama will feel pressure to postpone his proposed tax increases on high- income taxpayers, Litan said, something he has said he would consider if economic conditions warrant.
Reform Fannie and Freddie: A key reason why Treasury Secretary Henry Paulson put the two mortgage giants temporarily under government control and pledged to backstop its capital needs was to reassure foreign central banks - huge investors in Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) debt - that they would get repaid no matter what.
As a stop-gap measure, the conservatorship may have the desired effect, but central banks will be watching closely next year to see what lawmakers do to reform both companies for the long-term.
Currently, the extraordinary powers extended to the Treasury to invest in and otherwise do what it thinks best for the two agencies expires at the end of 2009. So even if no final decision about the companies' status is made - and conservatorship is extended - at the very least the hotly contested debate is likely to consume a serious amount of lawmakers' energies.
Reform financial regulations and oversight: It's an issue with bipartisan support in general if not in the particulars.
"We have an archaic financial regulatory structure that came in[to] place a long time [ago], after the Depression; it really needs to be rebuilt," Treasury Secretary Henry Paulson said Monday. "There are major changes that we need, and we also need major authorities to wind down financial institutions that ... aren't federal institutions with deposit insurance. We need resolutions and authorities to let us deal with situations like Lehman Brothers."
Indeed, Litan said, "it's a sure thing Congress will be preoccupied with fixing the financial system next year. I think everything will be on the table."
But, Abshire said, any changes to regulation have to be balanced with providing the right incentives to attract capital to U.S. shores, or risk losing out to foreign markets.
Ultimately, the next president needs to oversee fundamental change on several fronts.
To both candidates, Abshire says, "You're where Lincoln stood in 1861, where Roosevelt stood after Pearl Harbor, where Truman stood after Stalin made his grab for Europe. Are you going to answer the call to greatness?" 
