By Emily Kaiser - Analysis
WASHINGTON (Reuters) - President-elect Barack Obama can rewrite the Greenspan-era rules of finance, backed by a solid Democratic majority in Congress and an American public furious about the credit crisis.
Exit polls showed the economy was the dominant factor in Obama’s decisive victory over Republican Sen. John McCain on Tuesday, giving the new president a clear mandate to pursue the more populist approach to capitalism that he promoted throughout his campaign.
“At a moment like this, we can’t afford four more years of spending increases, poorly designed tax cuts, or the complete lack of regulatory oversight that even former Federal Reserve Chairman Alan Greenspan now believes was a mistake,” Obama wrote in a Wall Street Journal editorial this week.
For Wall Street -- and other finance capitals that followed New York’s lead -- that probably means a flurry of laws aimed at protecting homeowners and borrowers while tightening restrictions on banks and the investments they sell.
Obama has also proposed an economic stimulus plan that would include money for infrastructure, and he favors reforming the bankruptcy code to help homeowners and make it easier to restructure troubled mortgages.
Greenspan, a firm believer in free markets, was nicknamed “the maestro” after his tenure at the U.S. central bank coincided with a lengthy period of strong economic growth.
But he has since become a symbol of deregulation and critics have blamed him for allowing financial firms to outgrow government oversight. As losses piled up around the world in late October, Greenspan acknowledged that he was “partially” wrong to resist regulation of some securities.
“Those of us who have looked to self-interest of lending institutions to protect shareholder’s equity -- myself especially -- are in a state of shocked disbelief,” Greenspan told members of Congress.
Obama will not have the luxury of time. There is little doubt that the U.S. economy is slipping into a recession, perhaps the deepest since the 1970s, and the global economy is in grave danger of its first downturn in seven years.
World leaders are not waiting for the January inauguration to plan the broadest reform of the global financial system since the aftermath of the Great Depression in the 1930s. Obama is not expected to attend a November 15 meeting of the Group of 20 rich and emerging nations to discuss the financial crisis.
Investors are certain that tougher rules are coming.
“Those in the broad financial services industry should understand that Senator Obama has sent a very clear signal that he intends to pursue an activist agenda as president,” said William Donovan, a partner at the Venable law firm in Washington and former general counsel of the National Association of Federal Credit Unions.
“Overhaul of the government’s financial services regulatory structure, consolidation of charter types, tougher liquidity and capital requirements, bankruptcy and credit card reform are all on the table,” he said.
Obama faces the unenviable task of tackling a recession with a budget deficit swelled by the Iraq war and the $700 billion financial rescue plan. Global investors will be scrutinizing his every move.
“It’s not a good time for anyone to be elected president, given the problems there,” said Rob Henderson, head of market economics at National Australia bank. “He’ll be under pressure from day one to reinvigorate the economy, while also dealing with this enormous budget deficit.”
While there is little budgetary room, that probably will not stop Obama from pushing for another dose of government spending to prop up the economy.
Democrats in Congress have been calling for another stimulus package that may include tens of billions of dollars for domestic construction projects to repair aging roads, bridges and other infrastructure.
Obama has been supportive of infrastructure spending as a way to create jobs -- something that will no doubt take on greater urgency on Friday when the government releases its October employment figures. The report is expected to show 200,000 jobs lost in October, which would make it the weakest month of the year.
Editing by Patricia Zengerle