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Tuesday, March 28, 2023
WASHINGTON, Nov 29 2008 (IPS) - Faced with the worst crisis since the Great Depression, President-elect Barack Obama ditched tradition this week, naming his economic team before anointing a secretary of state – by custom the first and senior-most cabinet appointment.
His choices will marshal an unprecedented government effort to revive the economy and right the financial system. They include key figures familiar with both crisis and controversy.
Paul Volcker, central bank chief under Jimmy Carter and Ronald Reagan, is to head the new Economic Recovery Advisory Board modeled on an Eisenhower-era panel of nonpartisan national security advisers. He is credited with quashing U.S. inflation in the 1980s – but with policies also blamed for a severe recession.
Volcker recently blamed the world's "broken financial system" on Wall Street executive pay schemes that provide "tremendous rewards and payments of magnitude for presumed success and not much penalty for failure." No wonder, he added, that they turned into "alchemists", using exotic derivatives in a ruinous attempt "to turn dross into gold." He favoured breaking up banks into smaller units "so that the failure of one can't upset things."
Those comments might irk some on Wall Street but Obama's nominee to head the U.S. Treasury, Timothy Geithner, has been their darling, assembling recent bailouts as president of the New York Federal Reserve Bank.
U.S. Senate approval of Geithner's appointment is considered almost a formality following his immediate endorsement by Max Baucus, the Democrat who, as chair of the chamber's finance committee, will preside over the confirmation hearings.
Summers will coordinate economic policy across the new administration. He has advocated massive stimulus spending and played down concerns about a record-breaking federal budget deficit, saying demand for Treasury securities far exceeds supply.
It will fall to Geithner to ensure that a surge in U.S. government securities does not feed Chinese, Middle Eastern, and other foreign creditors' concerns about Washington's unprecedented borrowing spree.
The two could be aided or hindered by their experience of crises during earlier stints at the U.S. finance ministry. They served under Robert Rubin until Summers took over the top Treasury job in July 1999. During those years, the department came to be known as "the command centre for free markets" as, under Bill Clinton, the trio applied to capital what until then had been zeal for free trade.
In 1997, they snubbed Thai officials' warnings that trouble was brewing amid unstable speculation in everything from real estate to currencies. When the Asian financial crisis broke mere months later, the U.S. officials insisted that the region's governments cut budgets, let ailing firms fail and raise interest rates, all in hopes of appeasing international investors even at the cost of severe recession.
As others followed Thailand into the abyss, Washington oversaw international rescue packages assembled by the International Monetary Fund (IMF) and quashed alternative proposals put forth by Japan and others. In some cases, emergency loans were held hostage to demands that specific industries coveted by U.S. firms be opened to international investors.
In 1998, Geithner and Rubin tried to press Malaysia to stick with the IMF's prescriptions but were rebuffed: Kuala Lumpur abandoned high interest rates and austerity and then imposed short-term capital controls. Washington and the IMF insisted that investors would shun countries using such controls but in 2000, the fund admitted the measures had paid off.
Contrary to the agency's warnings, it said in a report, there had been no capital flight and no appreciable effort to shun Malaysia or circumvent its controls – and no speculative run on the country's currency as a result of its monetary and fiscal loosening,
As Geithner and Summers prepare to re-enter the international fray, the United States finds itself with insufficient standing to counsel – much less instruct – other countries to deregulate their financial sectors, eschew protectionism, and balance their budgets.
After all, Washington imposed Milton Friedman's painful strictures upon developing countries but, with the financial-crisis shoe now on the other foot, has itself plumped for protectionist bailouts and John Maynard Keynes's softer capitalism.
Obama also tapped Congressional Budget Office head Peter Orszag as White House budget director. His job of assembling the federal budget will involve identifying spending cuts to offset a fraction of the record deficit spending to come.
Christina Romer, an academic and Great Depression specialist, is to head the Council of Economic Advisers, a White House think tank. Melody Barnes, an Obama adviser and vice president at the centre-left research and pressure group Centre for American Progress, is to direct the Domestic Policy Council.
Obama's choices so far have included none from labour unions, which gave the president-elect a boost during campaigning. Positions might still be forthcoming on Volcker's advisory board or elsewhere in the embryonic administration, and labour advocates can nurture hopes that Obama will overcome business opposition and push through legislation making it easier for workers to form unions.
On Capitol Hill, Congressional Democrats said this week they were gearing up to help ready a stimulus package for Obama's signature soon after his Jan. 20 inauguration. Estimated at around 500 billion dollars, the measures aimed at averting millions of job losses and unfreezing credit seem set to dwarf Bush's 168-billion-dollar package of last February and the 175 billion dollars Obama proposed last month.
"We have to make sure the stimulus is significant enough that it really gives a jolt to the economy," Obama told reporters.
Slots for which nominations are expected in coming days include the heads of the Commerce and Labour departments. Oh, and the Secretary of State.
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