Economy: What now

Management of financial crisis will drive the initial agenda for nation's 44th president.

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By Jeanne Sahadi, senior writer

What should be President-elect Obama's first economic priority?
  • Creating jobs
  • Solving the Wall St. crisis
  • Cutting taxes
  • Reducing spending

NEW YORK ( -- The wear-and-tear of a 22-month campaign may seem like a Caribbean vacation next to what awaits President-elect Barack Obama when he takes over as the 44th president of the United States.

In his first year in office he will have to tackle a mountain of complex and unprecedented problems facing the country. His agenda will be driven by the need to stabilize the financial system and the pained economy.

Since mid-September, which was the last time took a crack at gauging what No. 44's economic to-do list would be, the financial world -- and Washington -- have been turned on their heads.

Consider just a few of the recent sea-changing events:

  • President Bush signed into law a $700 billion financial rescue package, which the Treasury is using to inject capital into banks in the hopes of spurring more lending and giving stronger banks the means to acquire weaker ones.
  • The government stepped in to bail out insurer AIG with more than $100 billion in loans.
  • The number of big Wall Street investment banks fell to zero after Goldman Sachs and Morgan Stanley converted to bank holding companies -- putting them under the control of the Federal Reserve.
  • The government decided to temporarily guarantee money market funds and significantly boost the federal deposit insurance coverage for individuals and businesses' bank accounts.
  • The Federal Reserve has opened its lending spigot to businesses and cut interest rates to near-record-low levels.
  • Countries around the world fell prey to the credit crisis, and one nation -- Iceland -- went bankrupt.
  • Stocks -- along with most people's nest eggs -- have had the stuffing knocked out of them.

And that was in just 6 weeks. Imagine what might happen in the 10-plus weeks between Election Day and Inauguration Day. For anyone with a nervous system left, let's hope not too much.

Give the economy a boost

In the meantime, here's a look at what Obama's economic to-do list is likely to be during his first year in office.

While Congress may pass a fiscal stimulus package during its lame-duck session after the election, the chances of that happening appear to be less than 50% given the current disagreement between the White House and Democrats over what constitutes effective stimulus and whether stimulus is even required.

If that's the case, it will be up to Obama to decide what measures are needed to juice the economy that offer the most bang for the buck.

Obama made a host of stimulus proposals in recent weeks, of which two are likely to garner bipartisan support:

Temporarily exempting seniors from having to make annual withdrawals from their IRAs and 401(k)s after age 70-1/2;

and temporarily exempting the unemployed from having to pay income tax on their unemployment benefits.

Beyond that, Obama has called for an extension of unemployment benefits, more infrastructure spending to create jobs, and temporary tax credits for businesses that create jobs in the United States.

Make the bank bailout work

The Troubled Asset Relief program, which is the centerpiece of the $700 billion financial rescue package that Obama voted for, is a work in progress. Treasury Secretary Henry Paulson has committed at least $250 billion so far to provide capital to banks and to create an auction to buy up troubled assets from financial institutions.

It's not clear what further decisions Paulson will make between now and Jan. 20 and what he'll leave for the next administration to decide. But on deck for consideration is whether to broaden eligibility for the TARP money to non-financial institutions. There has been talk, for instance, that GM is seeking a loan from the Treasury Department to help finance a deal to merge with Chrysler.

In any case, the process of injecting capital into financial institutions is one President-elect Obama is likely going to have to continue, as well as deciding where the bailout stops, said Alex Pollock, a resident fellow at the American Enterprise Institute and a former head of the Federal Home Loan Bank of Chicago. "It's very hard to draw the line. ... Everyone wants to make the case that they're essential to the national well-being."

Get to the bottom of the housing problem

Democrats and Republicans may disagree on the solutions, but both acknowledge that financial markets will continue to be hobbled until housing prices find their true bottom.

A continued decline in prices and increase in foreclosures, along with anemic economic growth, could put pressure on the next president to do something more to help troubled borrowers and the housing market.

Before Obama steps into the Oval Office, the government may already have taken some definitive action, using some of the $700 billion allocated in the financial rescue package.

Currently the Bush administration is said to be considering a program designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments to affordable levels. In exchange the government would guarantee some percentage of a lender's loss if borrowers re-default on their modified mortgages.

President-elect Obama will also have to address what to do with private-sector mortgage giants Fannie Mae and Freddie Mac -- the two government-sponsored enterprises that the government put into conservatorship in early September.

Reform financial regulation and oversight

He supported the takeover -- intended to reassure foreign investors that buy the agencies' debt. Long-term, however, Obama has indicated he wants their public functions to be completely disentangled from their private ones.

The credit crisis has painfully revealed three truths about the U.S. financial system: It's not as transparent as it needs to be; it's been run under rules that haven't kept pace with the development of new financial instruments; and it can't be reformed without input from and coordination with other countries.

It's not clear what, if any role, the president-elect will play in the upcoming global financial summit being held in Washington, D.C., on Nov. 14-15. It is expected to be the first of several.

But come Jan. 20, Obama will certainly have a large say in how the financial regulatory system is overhauled.

"It's a sure thing Congress will be preoccupied with fixing the financial system next year," said Robert Litan, director of economic studies at the Brookings Institution. "I think everything will be on the table."

Did you vote for Obama? How do you think the new president will affect your wallet? What do you think Obama needs to do to fix the economy - both in the short run and the long term? What should be first on the new Congress's agenda? E-mail us your thoughts, including your name, photo and contact info; the best answers will be featured in an upcoming article.  To top of page

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