Obama's Choice

When it comes down to it, Obama will be remembered most for his response to the economic crisis more than anything. It's a bit disturbing to find the chorus of voices growing louder that are saying that Obama will have to make a fundamental rewrite of our economic system to save America.

The nation's fast-darkening circumstances define the essential dilemma of Barack Obama's presidency. His instinct is to govern by consensus, in the moderate middle ground of politics. Yet dire events are pushing the new president toward solutions more fundamental than those he had intended. The longer he resists taking more forceful action, the more likely it is that he will be overwhelmed by the gathering adversities.

Three large obstacles are blocking Obama's path. The first is one of scale: his nearly $800 billion recovery package sounds huge, but it is perhaps two or three times too small to produce a turnaround. The second is that the financial system--still dysfunctional despite the bailouts--requires much more than fiscal stimulus and bailout: the government must nationalize and supervise the banks to ensure that they carry out the lending and investing needed for recovery. This means liquidating some famous nameplates--led by Citigroup--that are spiraling toward insolvency. The third is that the crisis is global: the US economy cannot return to normal unless the unbalanced world trading system is simultaneously reformed. Globalization has vastly undermined US productive strength, as trade deficits have led the nation into deepening debtor dependence.

While Washington debates the terms of Obama's stimulus package, others see disappointment ahead. The Levy Economics Institute of Bard College, an outpost of Keynesian thinking, expresses its doubts in emotional language that professional economists seldom use. "The prospects for the US economy have become uniquely dreadful, if not frightening," Levy analysts reported. The institute's updated strategic analysis warns that the magnitude of negative forces--the virtual collapse of bank lending, private spending, consumer incomes and demand--"will make it impossible for US authorities to apply a fiscal and monetary stimulus large enough to return output and unemployment to tolerable levels within the next two years." Instead, the unemployment rate is likely to rise to 10 percent by 2010. Obama's package amounts only to around 3 percent, annually, of GDP in a $13 trillion economy. Levy's analysis calculates that it would require federal deficits of 8 to 10 percent of GDP--$2 trillion or more--to reverse the economic contraction. And yet, the institute observed, it is inconceivable that this level "could be tolerated for purely political reasons" or that the United States could sustain the rising indebtedness without terrifying our leading creditors, like China.

In other words, Obama's stimulus package is a fraction of what it has to be. Republicans will never allow a larger one...but a massive package three times what Obama is planning is our only realistic hope.

The alternative is the dreaded Japan scenario: a decade long depression that will cost tens of millions of jobs and drop the standard of living in this country to a bare memory of what it is today. In order to avoid the slow death of our economy, a massive jolt of capital is needed immediately.

Sometime within the next couple of months, Tim Geithner and Ben Bernanke will be pleading for trillions again. They will be throwing around the N word...nationalization. The reported unemployment rate of 9 or 10% will in reality be much closer to 20 to 25% or more.

In other words, by 2010 we'll most likely be in the middle of the Second Great Depression.

Wrap your head around that. You'll have to. We'll all have to. Obama's window to truly fix the problem is growing narrower every day. Time is almost up.