LONDON, England — When Barack Obama is sworn in as U.S. president on January 20, 2009 he will be taking office on the usual wave of enthusiasm for a new political beginning, but against a grim economic background.

Barack Obama must act quickly to turn around the U.S. economy.

There’s a much-told story about a couple becoming utterly lost in the back lanes of some rural area and chancing upon an ancient local inhabitant.

Watch Bill Hubard of MIG Investments discuss what President-elect Obama must do to clean up the economic mess

Asked for the directions to their destination, the old man leans on his stick, furrows a wrinkled brow and remarks sorrowfully: “If I wanted to get there, I wouldn’t start from here.”

Obama won’t have any choice, any more than the couple in the story did.

Shortly after the crowds attending the inaugural parade have gone to their homes (assuming they haven’t lost them to foreclosure by hard-hit mortgage lenders), ill tidings will reach the Oval Office: the national income numbers for the fourth quarter of 2008.

They will confirm to everyone but a few academic pedants and hair-splitters that the United States will be well into recession by then.

By then, too, the usual remarkable capacity of the U.S. economy to create jobs will be fully exhausted. The unemployment rate will be rising inexorably.

Add all that to a housing market still on life-support, and the feel-bad factor will be overwhelming.

The U.S. consumer will be in parlous state, and retailers will be licking their wounds after a disastrous 2008 holiday season.

So what will the new president need to do to dig his nation out this sticky economic mess?

In fairness, a start has been made by President George W. Bush’s administration after a hesitant start.

Fingers crossed, the worst of the financial turmoil is already behind us: the banks have been underpinned by hundreds of billions of dollars of government money and U.S. stocks appear to be escaping out of the cycle of volatility that has marked the past few weeks.

Economic forecasters believe the back end of 2009 will see global recovery — without adding any riders stipulating that what the new U.S. president does will alter the outlook.

But it plainly will.

The holder of the most powerful office on the planet can do more than anyone to influence global economic fortunes, especially if he has the support of the U.S. Congress, which holds the key to the awesome power of the U.S. federal budget (albeit painfully overstretched by the bank bailout plan).

So what should Obama be doing? What will be his most powerful tools? How will he stimulate the economy? How will he best use the “presidential bully-pulpit” to instil confidence into a stricken nation?

Should he adjust the duties of the U.S. Federal Reserve to include an obligation to prevent the formation of financial bubbles? Or would he be well advised to avoid extending the boundaries of economic regulation, while perhaps making sure that the existing framework is used more effectively?

How will he lift the housing market off the floor? And should he reach out to those many Americans suffering the distress and humiliation of being turfed out of their own homes because they can’t make the mortgage payments?

Please give us your answers and ideas.

LONDON, England — How long can this go on? We seem to be locked into a terrifying cycle: stocks suffer days of sell-offs, followed by a powerful bounce. But just as we start wondering whether this market slump will follow the same pattern as its ugly predecessors of 1987, 2001 and many others and hit bottom, the same pattern repeats itself.

Traders at the New York Stock Exchange, where share prices have fluctuated strongly during the past few weeks.

It’s three steps back, then one step forward - and over the past few months it’s been repeated more times than I care to remember. To make matters worse, there never seems to be that much rhyme or reason to the selling or the buying. One day share markets worry themselves sick about global recession, then the next day all that is outweighed by some random piece of supposedly good news. A few hours later a renewed slide on stocks in another time zone has investors back in panic mode, and we’re off to the races again.

Market insiders point to several underlying factors, notably the aching uncertainty about where the credit crunch and the world’s leading economies are heading. But they say that what is clearly adding to the volatility is a frenzied scramble by hedge funds to move out of stock markets and also to make money for their investors by whatever means they can dream up. The betting is that they are both creating a lot of the volatility and riding it at the same time.

To add to the craziness, we are seeing some violent swings on currencies, with the Japanese yen and to a lesser extent the dollar (given the relative security of US Treasury bonds) now the safe havens of choice amid the carnage of “global deleveraging”.

With previous sell-offs, there seemed to be a clear end to the selling. It may have taken a while to come along, but in the end the bargain-hunters stepped in and there was a gradual return to normality, and then to sustained growth in share values.

So where are we now? When Warren Buffett said a couple of weeks back he thought Wall Street stocks were a buy, he may have been right about their current puny valuations, but not about whether those valuations could get even punier.

Speaking on Business International on Friday, Robert Parker, Deputy Chairman of Credit Suisse Asset Management, was a lot more cautious, predicting the return to a bull market would not come until the middle of 2009.

That would certainly be a few months before the predicted end to the current global slowdown, which most economists I speak to seem to think will only loosen its stranglehold at the far end of 2009.

What do you think? If so illustrious an investor as Warren Buffett thinks we’re close to the bottom, should the rest of us pile into stocks in hopes of rather decent gains within a couple of years? Or has even he got it wrong? Watch what Tom Hougaard, chief markets analyst at City Index thinks of your opinions

LONDON, England – What do you do once your house has burnt down? Rebuild it the same as before? Or think hard about why it burnt down — and make sure it is a lot less likely to do the same again?

There seems to be a feeling among many of the world’s leaders that once we have stemmed the present financial crisis, we should work out how to stop such a firestorm ever recurring.

The argument goes that this means redesigning the global financial architecture that has served since 1944, when an international agreement at Bretton Woods, New Hampshire, set up the International Monetary Fund and its sister institution, the World Bank.

Already sketching away on his drawing-board is the UK Prime Minister Gordon Brown — no doubt feeling himself to be the man of the moment after seeing his nationalization-by-another-name model for bank rescues being widely adopted, even by the Bush administration.

At its summit in Brussels, the European Union endorsed his approach and gave its blessing to this weekend’s visit to Washington by the French President and EU Council President Nicolas Sarkozy and the European Commission President Jose Manuel Barroso. (It must have taken at least two strong men to hold Brown back from jumping aboard the plane alongside them.)

It is of course hard to disagree with the prime minister when he calls for a global “early warning system.” That is about as controversial as motherhood and apple pie; of course we all support them. But the reality is that many authoritative voices warned of the dangers of spiralling personal and mortgage debt in the U.S., UK and elsewhere, but they were broadly ignored.

With all due respect and the luxury of hindsight, what is the point of going to great trouble to build a new early warning system when you have a history of ignoring the crescendo of early warnings of disaster — and when you allowed the problem to progress to the point of catastrophe?

The other question is one I raised on “Business International” a couple of days ago with Geoffrey Wood, Professor Economics at London’s Cass Business School: what caused the fire in the first place? Was it the system that was at fault, I asked him, or was it reckless misuse of the system that got us into this mess?

Wood told me that both were at fault, but that rebuilding the so-called financial architecture was “neither necessary nor helpful.”

So what did go wrong?

In Wood’s view, the regulators failed. So on Friday’s “Business International” I turned to Chris Rexworthy, a former manager at the UK’s Financial Services Authority. He conceded the point, while pointing to the difficulties of supervising a highly complex industry with a small body of enthusiastic, intelligent but ultimately inexperienced and probably underpaid regulators.

Another important strand of Gordon Brown’s argument is the need for globalized regulation in an of rapid globalisation. Again, that seems hard to dispute — but unless national regulators are up to the job, how would that work any better? Would the establishment of a supranational regulatory body really bring real benefits, or just tie up the world’s best financial brains in years of haggling over its shape, size, scope and powers?

So before we embark on that process, gushingly referred to as “a new Bretton Woods,” let us ask what part those 64-year-old institutions themselves have played in all of this? The fact is, the International Monetary Fund has been on the sidelines, with Managing Director Dominique Strauss-Kahn railing furiously about the intensity of the flames engulfing the financial house, while lacking water and a hose with which to douse them.

In fairness, the IMF has dealt admirably with what it was set up to do: deal with national governments whose financial payments got into scrapes. Its involvement in helping Ukraine is a fine example.

But what the fund was never designed to do was deal with a problem that originated within the commercial banking system. So it can hardly be blamed for the turmoil that swirls around us now, or for being left as more of an advisor than a rescuer. It was also never intended to save us from what we now recognise as the inevitability of the business cycle.

It is only human to seek a scapegoat, and a large well-heeled international organization like the IMF might do nicely. But ultimately, we need to address the real root of the banks’ woes: those famous “toxic subprime assets” — the result of fancy financial footwork which took advantage to minimal regulation and lumped ill-advised mortgage lending in with perfectly sound loans and then marketed them as “investment grade.”

Whose job was it to spot the dangers they posed and nail them? The answer must in future surely be national regulators and governments, aware of the global dimension and unafraid to turn to other nations for help and a common approach.

New Hampshire is an attractive place at this time of the year, when the autumn colors turn the hills red, orange and yellow, and especially appealing to officials and investors beaten black-and-blue by slumping markets.

But before we head off to revisit Bretton Woods, let us be clear what really went wrong, who was responsible, and whether we really need completely revamped financial architecture — or a well-constructed new wing to the house.

What do you think?

LONDON, England — They don’t make Mondays like they used to. In the good old days, Mondays were about cranking one’s mind back into working mode after a weekend of relaxation, occasional excess and not much else. The return to weekday routine involved a certain amount of pain, but no more than a mild sense of shock.

Over the past few weeks, things have changed. The collapse of Lehman Brothers a fortnight ago is only the most dramatic of the huge shockwaves that have pounded through the financial world, and a startling number of them have been unleashed on a Monday, following a weekend of frenzied negotiation and agonised decision-making by bankers, officials and government ministers.

This Monday is yet another monster day in the markets. The US bailout plan (apparently I should be calling it TARP, but I’m somehow wary of doing so) is due to be voted on in the House of Representatives; Wachovia’s banking operations are being bought by Citigroup; the governments of the Netherlands, Belgium and Luxembourg are bailing out Fortis to the tune of $16bn; the UK government, still reeling from the failure of Northern Rock, has now been forced to nationalise Bradford & Bingley, taking on its $80bn mortgage book; the German federal government is leading a consortium of commercial banks providing a $51bn line of credit to keep Hypo Real Estate afloat; and there are bank rescues under way in Iceland, Russia and Denmark.

Quite a list. But can you spot the odd one out? It’s actually obvious: the US bailout plan is the only one that is open-ended, does not apply to a particular bank, has not been substantially worked out behind closed doors and — crucially — the only one so far subjected to any degree of scrutiny by legislators. Under the US system of government, Congress holds the purse-strings, and though the President holds awesome powers, when he starts to think in terms of serious money, he has to seek Congressional approval.

It is actually remarkable how much firefighting the US federal authorities have done in this crisis without having to bow the knee on Capitol Hill (as US Treasury Secretary Henry Paulson rather chivalrously did before House Speaker Nancy Pelosi last week). The underpinning of the insurer AIG was an $85bn operation undertaken by administrative fiat.

But European governments and their funds are controlled by whoever has the majority in parliament, so once in office they can rely on their majority, act first and then worry about consulting other legislators afterwards — this is often not the case in the US. It does not mean that European legislators and the media will not give them a hard time. Look at the criticism the UK Chancellor of the Exchequer Alistair Darling has been subjected to after nationalising Northern Rock.

The separation of powers is one of the key features of the US Constitution, the work of people in whose ear the anti-British cry “No Taxation without Representation!” still resounded. The Founding Fathers created a President who would undoubtedly sit at the top of the tree of government and who would wield huge power in the fields of national defence and foreign policy, but who would always have to bow to the wisdom of other representatives of the people when it came to money.

On paper, then, a European head of government has a more comprehensive range of levers to pull, once she or he has gone to the trouble of being put in place by directly elected parliaments. Many on this side of the Atlantic will have watched the last 10 days of politicking in Washington with a mixture of bemusement and awe.

And John McCain and Barack Obama will also have drawn some important lessons from the contortions in which President Bush and his administration have had to indulge to hammer through their rescue plan. Sitting in the Oval Office is probably the greatest job in the world, but the US constitution sees to it that whoever moves in there on January 20, 2009 must remember who is picking up the check: the taxpayer — as represented by the Congress of the day.

John and Barack, it’s not too late. If humility is not your thing, now’s the time to drop out of the race.

It has a kind of inevitability to it. No sooner had U.S. congressional leaders proclaimed that they were on the brink of a deal than it all fell apart: House Republicans have declared that they reject a measure they see as unnecessary and reminiscent of socialism, and financial markets have reacted predictably to the latest dollop of uncertainty to land on their groaning plates.

You can read full details elsewhere on CNN.com, but it is worth noting that we are in effect looking at a split within the Republican Party, with the Bush administration unable to convince its allies in the House of Representatives (which as an institution is crucially important in matters of the federal budget) that this dramatic measure is necessary. Congressional Democrats, by contrast, appear to be on board.

It may be no bad thing that the discussions are continuing. The sum involved is colossal, as are the power handed to the Treasury Secretary and the ideological about-face involved for almost all the United States’ political leaders. Wise heads are pleading for more thinking to be devoted to proper guarantees for the taxpayer, including provision for the federal government to take an equity stake in the banks its assists, as it did with the failing insurer AIG and as happened when Sweden successfully rescued its banks from a similar pickle in the early 1990s.

That, though, would stick in the craw of many Republicans; they’d see such state ownership as “socialistic and unamerican.” But it is interesting that one of the many voices calling for equity stakes is that of the billionaire investor and philanthropist George Soros, hardly someone bent on destroying the capitalist system which has made him so wealthy.

Hold on a minute, though — where is the Republican presidential nominee John McCain in all of this? He broke away from the presidential campaign a couple of days ago to return to Washington and help work on the crisis, and President Bush invited him along to Thursday’s key meeting at the White House, along with the biggest names from Conress and Treasury Secretary Henry Paulson.

All the same, McCain is reported to have said little. His Democratic rival, Barack Obama, by contrast, did not allow himself to be wrong-footed for long: he is reported by the New York Times to have “peppered Mr Paulson with questions”.

That silence seems to have stung the House Republicans: one reason for their anger is their perception that the bailout plan is being rushed through before their man has a chance to put his mark on it and reap due political gains.

But while this may be an awkward time in U.S. politics, it’s an ugly one in U.S. finance: after the White House talks broke up, Washington Mutual went down in the biggest-ever failure by a US bank. As the talks restart on Friday, that should concentrate a few minds.

It is a rule of thumb in big negotiations like this one that there are false dawns and false sunsets. Brinkmanship is a skill much practised in Washington DC.But here is an awesome chance for the two presidential candidates: which of them has the statesmanship to heal the rift between Republicans and Democrats and lead the country — and the global financial system — to a fair and effective solution to the crisis?

LONDON, England — It’s not that far from the U.S. Treasury, next door to the White House, to the great white dome of the U.S. Capitol. But as Treasury Secretary Henry Paulson shuttles daily along Pennsylvania Avenue to plead with America’s legislators and secure their swift approval for his plans to bail out struggling U.S. banks, it must feel as if he’s crossing a huge cultural divide.

Paulson must use all his skills in dealing with politicians.

Let me explain. Paulson is from Wall Street, where he used to run Goldman Sachs, and in financial markets, there’s a particular discipline to describing problems and suggesting solutions. There’s no room for distortion, exaggeration, sentimentality or wishful thinking; you have to call things the way you see them. If what you see happens not to fit in with your ideological viewpoint, tough.

The political world is different. I’m not calling politicians liars here, but what I think they would acknowledge is that, in politics, to call things exactly the way you see them can be painfully naïve and damaging. Call it restraint, call it spin, call it smoke and mirrors; if you’re in politics you need to look principled and you have to toe the line. That’s why you were elected, and if you really have to abandon your principles, make sure you’re as graceful and as persuasive as you possibly can be.

There’s no grace to the jagged shape of the ideological U-turn Henry Paulson has described in embracing the $700 billion bailout plan he and the Fed Chairman Ben Bernanke are touting to Congress. Not only have recent events forced him to set aside his own personal beliefs in free markets and minimal regulation, but he has had to drag the rest of the Bush administration with him, including a president steeped in the idea that business must be free and taxes must be low.

It speaks volumes for Paulson’s advocacy that he has succeeded here. Now he has to do the same on Capitol Hill, and I suspect that his appearances there will have been among the most stressful moments of his life. He has not minced words when describing what he sees as the consequences of failure to rescue the banks and the financial system, and whether or not you think he is doing the right thing, he is clearly totally convinced in his own mind that this bumpy road is the only way forward, and he has no qualms about letting his conviction shine through — even if he surely thought something quite different a couple of weeks ago.

Equally striking, though, is the way that Paulson’s elected questioners seem publicly to be going through the motions of hostility and resistance to the bailout plan, even as we learn that behind the scenes there is strong bipartisan support for it. The betting is that the legislation will pass in some shape or form, yet there’s an unwritten understanding that as part of the price of approving it, Paulson, Bernanke and administration officials have to be given a ritual hard time.

The politicians know that the fallen titans of Wall Street are an easy target, and by saying that the bailout plan gets them off the hook, they will score points among the voters. I won’t call it bad faith, just part of an essential political process in a mature democracy. Perhaps, though, this feeling explains why I prefer to cover business rather than politics.

Henry Paulson also used to be an American Football star. It’s a game in which sheer weight counts — look at the size of the players — but skill trumps weight. He knows it’s not enough for the Treasury Secretary, the Fed Chairman and other financial luminaries to demand something. They also have to deploy their utmost skills — and, crucially, be seen by the voters to do so — if they are to win this game against opponents who love to play to the grandstand.

LONDON, England — The sums of money that the U.S. Congress and the U.S. Treasury regularly deal in are huge. But it is not every day that the U.S. Administration submits a plan to commit $700 billion in taxpayers’ money, and that the bosses of the Treasury, the Fed and the Securities and Exchange Commission go to Capitol Hill to submit themselves to leglislators’ questions and urge their financial bailout plan’s rapid passage into law. (It’s also been fascinating live television.)

Treasury Secretary Henry Paulson, left, looks on as Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill Tuesday.

There is an enormous amount riding on this, as my colleague Maggie Lake pointed out earlier Tuesday, and global financial markets are watching very carefully to see whether Congress waters down the measures proposed by the Fed and the Treasury, and to see exactly what system of oversight it puts in place to make sure the taxpayer is not fleeced. The kind of rhetoric we’ve heard from certain Congressional opponents of the plan — I just heard one Republican call the plan “financial socialism” and “un-American” — sends a shiver of fear through the markets.

On Monday’s edition on “Business International” the former UK Chancellor of the Exchequer, Kenneth Clarke, told me “I weep for the U.S. taxpayer.” With good reason: one important consequence of allowing the bailout to go ahead will likely be a doubling of the U.S. fiscal deficit from the current estimate of about $450 billion or 3-4% of GDP next year to something more like 6% of GDP: approaching if not surpassing a trillion dollars in a single year.

Let’s just stop and think about what that means. Together with the U.S. trade deficit, the federal budget deficit has long been a major source of worry and instability in the international financial system. And to put it bluntly, if the United States lives beyond its means, somebody has to lend it the money to do so.

What that actually means in practice is that the U.S. Treasury issues debt; it prints bonds and sells them in the marketplace. So who buys them? The short answer is: pretty well everyone in the world of global investment, including central banks, investment banks, asset managers and hedge funds on every continent on the map, acting on behalf of all of us who set money aside in a pension fund or even a bank savings account.

The success of the current bailout plan depends on all those non-U.S. institutions being willing to buy into a huge surge in the amount of U.S. Treasury debt. If they don’t, this historic bid to jump-start the credit markets will fail. My bet is that they will, not least because in these times of continuing turmoil and weak growth those handsome T-bonds will offer greater safety than stocks.

One point that has triggered some angry muttering on Capitol Hill is the idea that foreign banks active in the U.S. should be able to sell their “toxic” assets to the federal government in exactly the same way as U.S.-owned ones. Some critics of the current bailout proposals note that governments outside the United States have done far less to defuse the current financial turmoil than the Bush Administration, and these critics would prefer to see their taxpayers’ largesse handed down only to U.S. institutions.

That would be a mistake. This is a problem which stems from crazy under-regulated lending in the United States, and which was triggered by the bursting of the U.S. housing market. It is a U.S. problem that requires a global response, but the main thrust of efforts to solve the problem must come from Washington.

To make an artificial distinction between U.S. banks in trouble and foreign banks in trouble would make many financial decision-makers think twice before operating in the United States. The U.S. economy and financial system may be mighty indeed, but these days they need all the help they can get.