Inauguration day brings to mind the reason I don't read science fiction. It's
never weird enough. Today, America will place more power than any peacetime
president ever has wielded into the hands of a man nobody knows. He has
convinced more incompatible constituencies that he takes their side than any
politician in American history. And through no fault or merit of his own, he
has stumbled into more power than the White House has had since World War II.
From the day Obama was elected to 9:30am Tokyo time on Monday morning, the
S&P 500 index has lost 17% of its value, after absorbing Obama's proposed
cabinet and hearing the gist of
his economic stimulus plan. That can't be blamed on Bush. It counts as the
"Obama crash". With the unprecedented power of his office, Obama inherits a
commensurately high level of accountability. Unless he offers something
radically different, the boomerang of expectations could flatten him faster and
more thoroughly than the swift ascent of his star. People in power get blamed;
people with absolute power get blamed absolutely. As the economy continues to
deteriorate, there will be no one left standing to blame but Obama.
Before America entered World War II, Franklin Delano Roosevelt borrowed no more
than 6% of gross national product in a given year. During his first year in
office, Obama will have borrowed perhaps double that amount.
Figure 1: Federal borrowing as a % of GDP: Roosevelt vs Obama's First Year
The weight of the Obama administration in terms of financial flows will be
double that of the Roosevelt presidency at its peak, and that does not account
however many trillions of dollars in assets the Federal Reserve buys for its
own account. These numbers barely express the government's muscle. With bond
markets shut down, the banks are the only provider of credit, and the
government can tell the banks how and to whom to lend, in return for trillions
of dollars of guarantees and capital injections. The big banks are private in
name only. Complaints about lending policy go straight to Washington.
Never in peacetime has the Federal government commanded such an enormous share
of financial flows, and never has it had such a capacity to command such flows.
Investment-grade corporate borrowers pay three to four times the bond yield
rate that the Treasury does, against an historical range of one or two times,
which is to say that private borrowers are priced out of the market. Corporate
bond issuance towards the end of 2008 was running at a fifth or so of the 2007
level.
Figure 2: Baa-rated bond yields as a percentage of Treasury bond yields
If the Ronald Reagan revolution shifted the balance of power away from
Washington and towards the challengers and entrepreneurs, the present crisis
has restored Washington's power with a vengeance. Tax cuts and deregulation
opened the field to new entrants who quickly overwhelmed the old corporate and
moneyed elite. Mortgage-backed securities unlocked the capital in American
homes and became the largest fixed-income market in the world. Small firms such
as Lehman Brothers and Bear Stearns became industry giants. Bank of America
grew from a little North Carolina bank that broke through the barriers to
interstate branch banking. The technology boom made venture capitalists into
billionaires.
Lehman and Bear Stearns are dead, and Bank of America took on a federal yoke
last week in the form of a US$130 billion bailout. The technology sector is
moribund and investors are breaking commitments to venture capital funds. The
entrepreneurs and promoters who followed Reagan's camp have gone from
shirtsleeves to shirtsleeves in a single generation.
At the capillary level of the American economy, the Republican political base -
local boosters who lived off the fat of the real estate market - has sunk out
of sight. It is as if Joseph Stalin had killed off the kulaks to make
America safe for Obama. Even before the October bust, Obama outspent Senator
John McCain by 3 to 1 on television during the past campaign. The big sources
of Republican money are badly damaged by the economic collapse and will take
many years to return.
Globally, the advantage of the American government over prospective rivals is
even greater. A double-digit decline in world trade and a collapse in commodity
prices leaves Russia, Brazil and the Middle Eastern oil exporters gasping for
air, and leaves China and the Asian exporters conducting emergency damage
control.
Figure 3: Cost of credit protection on a broad index of emerging markets,
January 2005 to January 2009 (basis points above London interbank offered
rate.)
The cost of protection against sovereign defaults by emerging markets
quintupled this autumn from the level prevailing since 2005. The effective
collapse of Argentina, Ukraine, Pakistan and Venezuela skews the number higher.
The number of countries that have become wards of the international community
will continue to rise.
Economic disaster will occur in geopolitical hotspots, starting with Pakistan.
New York Times reporter David Sanger wrote on January 11 that Pakistan's
nuclear arsenal might be Obama's worst nightmare. The candidates for "worst
nightmare", though, have multiplied since I warned at the end of October that
the world isn't flat - as one New York Times writer likes to say - but rather
flattened (see The
world isn't flat, it's flattened, Asia Times Online, October 28, 2008).
The prospects of a narco-state on American's southern border, now widely mooted
in the press, might be the most daunting.
What will Obama do? He has more answers to urgent problems than the verses of
Barnacle Bill the Sailor ("I'll tell Iran/that I'm the man"), but they are just
as fanciful.
I have never met the man, but I have interviewed a fair sampling of his
supporters, and conclude that Obama learned the power to cloud men's minds,
like the Shadow
on the old radio show. Apart from ambition, there is no "there" there. There
are as many Obamas as there are interlocutors. He is a hollow man, I concluded,
a Third World anthropologist studying us with engaged curiosity but complete
emotional detachment. In this respect he is unpredictable.
I predict that he will do nothing much at all. The American economy is in
trouble because Americans got too much cheap credit to buy houses, using their
price appreciation to buy other consumer goods. Obama proposes to provide more
cheap credit to homebuyers and incentives to buy consumer goods, which seems an
odd response to the problem. Now that Americans are scared out of their wits
and likely to save every available penny, it is hard to flush with enthusiasm
over his program's prospects.
Obama's secretary of state, the redoubtable Hillary Clinton, will pursue the
same tired formulas in the Middle East and South Asia into tighter and tighter
little circles, until she quits in frustration. His Treasury secretary, Timothy
Geithner, will do precisely what he has done in the past year in his capacity
as head of the Federal Reserve Bank of New York, which is to use the federal
balance sheet to buy trillions of dollars of toxic assets. And Defense
Secretary Robert Gates will continue to attempt to engage the Iranians, as he
has done since the Islamic Revolution in 1979, when he took notes for president
Jimmy Carter's national security advisor Zbigniew Brzezinski in meetings with
the newly empowered mullahs.
He will make resonant speeches, hold frequent press conferences, consult friend
and foe alike, and tread water while America's economy and strategic position
continue to deteriorate. His entourage of one-trick wizards, as I called them
in a recent commentary, will pick over the broken American economy for trophies
to put into private equity funds. (See
Obama's one-trick wizards, Asia Times Online, November 25, 2008).
Without casting aspersions on anyone involved, the opportunity for self-dealing
in a multi-trillion-dollar bailout-cum-recapitalization of the financial system
exceeds the grandest dreams of Third World kleptocrats.
At a certain point he will have to take a decisive stand on something. And then
we will learn who Obama is, and what he wants. Four years ago, I predicted of
George W Bush, "Many will be the night during his second term that Bush will
wish he were still in Texas, and still drunk." (see
Careful what you Bush for, Asia Times Online, August 3, 2004). I
predict that there will be nights when Obama will wish he were still in
Springfield.
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