Obama's Challenge: Worst Economic Crisis in 70 Years

Barack Obama prepared to make history Tuesday as the first black U.S. president, riding a wave of public optimism he will need to tap to deal with the worst economic crisis in 70 years and two wars.

Hundreds of thousands of people, bundled up against the cold, packed Washington's Mall, which stretches 2 miles from the Capitol to the Lincoln Memorial on the Potomac River and along Pennsylvania Avenue to the White House.

Photo By: Matthias Kötter

There was late word that U.S. authorities were investigating a potential threat, which they said was of uncertain credibility, in connection with the inauguration, the U.S. Homeland Security Department said on Tuesday.

Television pictures showed a sea of people, many waving American flags, in the grassy plain of the Mall about two hours before Obama, a Democrat, was due to be sworn in as the 44th U.S. president just before noon EST, taking over from Republican George W. Bush. 

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As if to underscore the challenges, stock markets in Asia dropped sharply on Tuesday while the main European shares were mixed in trading with banks falling steeply on capital worries and pharmaceuticals gaining due to their defensive appeal. Meanwhile, Wall Street opened lower, with the DJIA, S&P 500 and Nasdaq falling between 0.6 percent and 1 percent.

Obama's team has vowed to make its bailout funds work harder to get credit flowing again to cash-starved consumers and companies and is expected to announce soon changes to the second half of Washington's $700 billion bank rescue scheme.

One of the options discussed in Washington is to create a government-run bank to acquire bad assets clogging the financial system. The incoming president is also working with lawmakers to launch a two-year $825 billion fiscal stimulus plan by mid-February.

Governments around the world have committed trillions of dollars to fiscal stimulus packages and bank bailouts in response to the crisis which has spiraled from a U.S. housing collapse and pushed much of the world into a recession and many firms deep into the red.

Britain's multi-billion-pound bank rescue announced on Monday was the second since October and came as Royal Bank of Scotland said it was on course to report a 28 billion pound loss for 2008 -- the biggest in UK corporate history.

Washington's $20 billion lifeline for Bank of America announced on Friday also had only a fleeting market impact.

After modest gains this month, investors, battered by grim economic data and news of hefty corporate losses and job cuts as the fourth-quarter reporting season gets under way, pulled back again from anything riskier than top-grade government debt.
     
Economic Gloom Deepens

Economic figures due later this week are only set to deepen the gloom. Britain is set to confirm on Friday it is now in its first recession since 1992.

China, the world economy's main growth engine, on Tuesday reported its first rise in urban unemployment in five years and is expected to show this week its economy expanded at its slowest rate in nearly a decade in the final quarter of 2008.

Asian shares retreated more than 3 percent and U.S. stocks futures fell about 1.5 percent heralding a tough day ahead on the Wall Street which reopens after the Martin Luther King holiday on Monday.

"There could be some positive psychological effect on the market about Obama's economic policy," said Tony Tong, analyst with China Everbright Securities in Hong Kong. "But the implementation will take time and its impact on the economy may take (even) longer."

Commentators point out that the public expects Obama to achieve so much that he looks doomed to disappoint no matter what he does.

"The expectations for the Obama administration are off the charts," said Willian Keylor, a history professor at Boston University. "Whatever he accomplishes will be below the extraordinary expectations that people have for him.

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Even if Obama manages to push through his stimulus package and the revamp of the bank rescue quickly, the time it will take for them to bear fruit may come as disappointment for many.

"The economy does not respond to defibrillation," said Ross Baker, a political scientist at Rutgers University. "People have this notion that you can put the paddles on it and restore it back to life and that's quite unrealistic."

Confidence is running so low that credit remains very tight for businesses even after central banks have slashed their benchmark rates, driving them, as in the case of Japan or the United States, virtually to zero.

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In Japan, in yet another sign of the depth of the credit crunch, the central bank announced its second special corporate debt operation supplying unlimited funds to firms at its ultra-low 0.1 percent rate.

Markets worry not only that bank rescues and government pump-priming will take time, but are also increasingly aware that those extraordinary actions to stem the financial wildfire come at a steep price, such as for fiscal balances.

Monday's downgrade in Spain's credit rating by Standard & Poor's drove that message home, hitting the euro as investors  feared other government in the euro zone could experience the same fate as they spend heavily to refloat their economies.

Worse still, the agency, which cut Greece's rating last week and has Ireland and Portugal under review, said government efforts might still be insufficient to counter what is expected to be Spain's worst recession in half a century.

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