:: Govind Talwalkar

Obama plan is reassuring, but economic fear persists

Govind Talwalkar

March.3 : In his first address to the joint session of the Congress on February 24, President of the United States of America, Barack Obama, changed his tune of gloom and doom and assured the lawmakers and fellow Americans that his administration would do everything possible to overcome the present economic crisis.

From the day he took the oath of office, Mr Obama had assumed a stern posture and told people that they were facing a crisis which was as dire as the depression years. He used to warn that if his stimulus plan was not adopted, the country would face doom. These speeches were aimed at the wavering Democratic lawmakers and to pressure the Republicans. But they had the reverse effect. The Democrats were not reluctant to accept the plan and the Republicans were not prepared to modify their position. People became disheartened and the share market plunged, with the market losing about 1,000 points in the course of a month. So it was a relief when the President, in his address to the Congress, confidently assured that he would do everything to overcome the crisis and expressed his faith in the traditional ingenuity of the American people to come out victorious of every trial. The address was not expected to spell out the details of his policy and programme. Those would be made clear in the budget which is to follow.

Mr Obama said that he was pouring money into the troubled banks not to save the irresponsible managements but to help people who need credit. He again warned the bankers that every dollar advanced would be accounted for and the days of irresponsible administration were over.

Scores of large and small banks have been helped in recent days but almost all of them are in need of more help. Business has not revived and unemployment is growing. Thus, the banks are not receiving more deposits nor are they attracting large capital.

The government stimulus plan has confused the banks — they do not know where they stand. With the government investing in the banks it now naturally has a say in their management, and more help may bring more intervention from the state. At the same time, the banks do not know which authority they are answerable to.

Talk of nationalisation of banks has created more uncertainty and distracted the investors. The administration itself does not know what exactly it wants to do and how to proceed. To the Americans — at least, the middle class Americans — the word nationalisation is anathema. But American critics forget that it were the banks which went to the government with a begging bowl. Britain is familiar with nationalisation — one large bank has 100 per cent government investment and a couple of others have 40-60 per cent.

People expect the US government to help the banks and compel them to shed some flab so that they would be manageable. In the last decade or two, merger-mania had gripped the corporate sector and cheap money created a false sense of prosperity. But with the downward trend, banks lost ground. To start credit flow again, banks need financial support and a clear understanding about their future.

Mr Obama reminded the lawmakers as well as the people that this is a time of reckoning. He warned that people and their representatives would not be able to live beyond their means. But members of the House of Representatives and the Senate have vested interests in various schemes and it would be hard for Mr Obama to totally stop this practice.

Mr Obama is yet to tackle the housing problem — thousands of people have had to vacate their homes because of foreclosures as they defaulted on their mortgages. More would join their ranks as unemployment is on the rise. Solution for this problem will take several billion dollars, but the government is yet to figure out where to begin.

Mr Obama declared in his speech that he would give top priority to reforms in education and energy. The stimulus plan provides for such reforms but the implementation is not easy. Take education in the US, for example, which is lousy at the primary and secondary level. The school terms are of shorter duration than in other countries and indiscipline is rampant. The teachers’ union is very strong and donates large amounts to the Democratic Party which does not discourage its closed shop methods. During his campaign Mr Obama had said that incompetent teachers would be dismissed, but as President one wonders whether he would be able to do much to stop this rot in the system.

It is commendable to undertake energy reforms and it is good that in the name of renewable energy the administration might not pursue the policy to encourage costly schemes like ethanol. Mr Obama seems to be aware that the farmers’ lobby represents large farming companies and not the actual cultivators.

Infrastructure facilities are to be improved under the package. More investment for the construction of roads and bridges as well as improved transmission of power would give fillip to industry and agriculture which in turn is expected to increase jobs.

It is understandable that Mr Obama, in his address, did not dwell much on foreign policy issues and only mentioned Afghanistan and Pakistan as the US’ domestic problems are stupendous. He reiterated that combat troops in Iraq would come back in 19 months. Some knowledgeable persons have a different take on the situation in Iraq — they want to see what happens when the Americans leave Iraq. It is better to wait and review the situation in both Iraq and Afghanistan, which Mr Obama has promised. He would then spell out the new strategy.

The solution of the Afghanistan problem is political and lies in Pakistan. The rise of the jihadi elements in Pakistan cannot be blamed on Pakistani leaders alone as US policies for several decades played into their hands. Moreover, the US cannot absolve itself for the failure of political leadership in both Pakistan and Afghanistan. The situation now is very delicate and requires thorough appraisal.