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
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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 hot spots, 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.

https://web.archive.org/web/20090414035546/http://www.atimes.com/atimes/Global_Economy/KA21Dj08.html

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