January 18th, 2009
09:57 AM GMT
LONDON, England – Dear President Obama,
Enjoy your inauguration, and party like there is no tomorrow, because that day is about as much fun as you are going to have.
You have a daunting and unenviable task, fixing the worst financial crisis since the Great Depression. It's clear - what's happened to date hasn't restored confidence in the banking sector.
Much more will need to be done and it needs to be dramatic and bold. Already being discussed is setting up a bank that would acquire the banks' toxic debt.
The thinking seems solid enough; if the bad debt is taken off the books, that will mean fewer write downs, free up capital, and that could lead to more lending.
That was the original idea behind the $700 billion bank bailout cooked up by the Bush administration. But then it couldn't figure out how to price all that bad debt, and so they decided to give the banks capital instead. That left the bad debt sitting there, leading to the renewed lack of confidence in the banking system. So going back to the original idea is now once again in focus.
The other idea, of course, is to guarantee the toxic assets that remain on the banks' books, such as authorities did this past week for Bank of America.
None of this will be cheap. It's estimated that up to $1.2 trillion in new aid could be needed. Of course, that's on top of the massive amounts of money already thrown at the problem.
Which brings me to my final point, the ballooning budget deficit. It's estimated it will more than double this year to about $1.2 trillion, or 8.3 percent of GDP, the biggest budget deficit in the post-war period. And that figure doesn't include the proposed $825 billion economic stimulus package. You yourself have said there is the potential to have trillion-dollar deficits for years to come.
No wonder you've appointed a chief performance officer to see where savings can be made in the federal budget.
I realize you have no choice but to pull out all the stops to try and get the economy moving again. It, along with getting the banks lending again, is priority number one. But for the sake of the long term health of the economy, rein in the deficit as soon as it's possible.
The U.S. national debt keeps growing and could reach a mind boggling 400 percent of GDP by mid-century if current tax and spending policies are not addressed.
You've been dealt a tough hand. The weight of expectation on you is huge. You've tried to play down those expectations, but they remain.
So enjoy your inauguration day, enjoy the adulation, and the overwhelming good will and optimism you've engendered.
And as the recession lingers on, I hope the public will be as forgiving as they have been hopeful. The problems the economy and banking system face are more than one very well intentioned and articulate man can easily cure.
As your wife Michelle reminds us, you may be a gifted man, but at the end of day you are still just a man. I wish you the best of luck.
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