The US will shortly have a new President. Congratulations to all concerned, particularly those who kept their cool during the intense moments of crisis during the fall and who surmised – early and correctly – that the current situation requires decisive and comprehensive action. We already have a large fiscal stimulus in the works, a significant housing refinance program was surely being signalled last week, and we are waiting to hear through exactly what kind of new structure the bulk of TARP II funding will be deployed.
If banking stabilizes of its own accord over the next week or so, the new Administration will lean towards a New Bank focused primarily on restarting consumer lending (or they can expand the mandate of a relatively clean existing structure such as Fannie or Freddie). If banking continues to deteriorate, then more of an RTC-type structure is likely to prevail, i.e., at least partially cleaning up banks’ balance sheets – presumably in return for lending requirements.
There is definite potential for inflation in this strategy, but this would not be the worst thing – the gap between the consensus and our view is narrowing on this. And in any case President Obama can, quite reasonably, blame his predesssor for almost everything that goes wrong. And Obama can also argue, plausibly, that things would be even worse without his bold actions.
Unfortunately, in most of the rest of the world the economics and politics are not so favorable. Let me remind you of the main points, illustrated with some of the latest developments. Continue reading “Obama Can; The Rest Of The World, Not So Much”
The Baseline Scenario 