Five Economic Challenges Facing the Next President

Tuesday, Nov 4, 2008  |  Updated 6:15 AM PDT
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Five Economic Challenges Facing the Next President

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Revitalizing the nation's economy will be the top priority for whomever is elected president on Tuesday.

 

But talking about an economic recovery and making one happen are two hugely different things. And whether it's Barack Obama or John McCain who becomes the nation's 44th president, he'll face an unenviable task.

"Whoever it is is just going to have egg on their faces two years from now. There are just so many problems and there's no money," says Kathy Boyle, president of Chapin Hill Advisors in New York. "I wouldn't want this job if you paid me $3 trillion a year."

Yet financial experts say there are five basic steps the new president can take to assure the public that something is being done.

1. Get Everyone on Board

"The first thing to do will be to get an economic plan that everybody agrees on in place and start restoring confidence to the market," says Peter J. Tanous, president of Lynx Investment Advisory in Washington, D.C., and co-author of "The End of Prosperity," a book that examines the extent to which higher taxes will decimate the economy. "That's clearly job one."

Lack of a consistent plan of attack has hindered Washington from stemming the damage caused to the economy from the crumbling financial infrastructure.

Free-market Republicans have clashed with interventionist Democrats in a perpetual conflict that has culminated in conflicting regulations and monetary policy. The result has been easier access to capital but reluctance by banks to use that money to lend.

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That has to stop, says Tanous, an Obama supporter who rejects the notion that the Illinois senator's economic plans would bring contemporary capitalism to its knees.

"We won't have the end of free markets. What we will have is the end of laissez-faire capitalism as we knew it," he says. "We will have new regulations to make sure it never gets out of hand again as it did this time."

Still, Tanous adds that Obama is the first Democrat he'll support for president since John F. Kennedy, and warns that an Obama presidency would have to include significant participation from the Republican side.

"If I'm right in thinking that the (Obama) mandate is going to be huge, the periods of time when Democrats especially have controlled all three branches of government have not been happy," he points out. "But one has to hope that a President Obama will manage it well and not leave things to the far left wing of the party."

2. Create a New Mindset

Most market analysts see Wall Street getting at least a modest post-election bounce, and there's hope that a change in mood also can affect the economy in a broader sense.

To do so, the president will have to show he means business right from the start.

"The issues are trust and confidence, which doesn't necessarily cost the country much," says Kurt Karl, chief economist at Swiss Re. "The president has to take charge, along with the secretary of the Treasury, as well as working with the chairman of the Fed and the regulatory authorities, to make sure we get through this."

The candidates have spent time discussing the role of the US in the world and the new president will need to address that issue aggressively, with coordinated, global policy moves critical, Karl says.

 

"It's a global problem and with our global connections, working with our major partners, will be a benefit and increase confidence," he says. "That kind of cooperation and effective action and taking charge is part of the solution, part of the confidence-trust solution, which is less about money and more about changing the psychology."

Tanous predicts that could be the one area where the new president might have an advantage by sheer strength of the changing of the guard.

"I think that there will be a burst of enthusiasm than for no other reason than this interminable process is over," he says.

 

3. Fix Banking and Housing

One of the great uncertainties facing that new president and all the new enthusiasm will be how the banking industry gets fixed.

Repeated and historically aggressive measures by the Fed to get banks lending again have been unsuccessful, though a full-scale blowout—along the lines of the savings and loan crisis of the late 1980s—of bank closings has been averted thus far.

Homeowners haven't been so lucky, though,with thousands entering the foreclosure process each day.

As such, the president will have to tread carefully with just how far he's willing to go to help financial institutions and how much attention will be needed towards those struggling with mortgages or whose homes are worth less than they owe.

 

"I think the challenge will be to help design a restructuring of the regulations of the financial system to make it better and to avoid these kinds of catastrophes," says David Ressler, chief economist at Nomura Securities in New York. "To do it right is going to be a long and careful deliberative process. My concern would be that this mythical 100-day window that everybody gauges new president's by might foster haste that in the long run will make waste."

At the same time, those troubled homeowners are going to need help dealing with their burdensome mortgages.

Two banking officials discuss challenges for the next president in video at left.

Both candidates have addressed the mortgage issue, with the Republican McCain proposing that the government step in to buy the distressed mortgages.

But Ressler thinks perspective will be important in dealing any of the economic problems. Overarching government programs could make matters worse.

"Just as markets swing beyond the equilibrium in both directions, I think public attitudes may swing beyond the objective perspective as well," Ressler says. "I don't know for sure that's what has happened, but there's reason to believe that things aren't as dire as the worst-case scenario would have you believe. Yet that probably won't be a popular theme."

4. Don't Even Think About Raising Taxes

Even an avid Obama supporter like Tanous cringes when he hears the Democrat's proposals to impose harsher levies against the richest Americans.

Taxing someone—anyone—in these types of economic conditions is being greeted with near-unanimous disdain among market watchers. Obama in particular has indicated tax increases in capital gains and Social Security for top wage-earners are a distinct possibility.

"I hope that, and I frankly fully expect that, all this talk about raising taxes is going to disappear, because raising taxes of any kind in this kind of environment would be catastrophic," Tanous says.

But economists aren't any happier about the looming prospect of a trillion-dollar federal budget deficit.

It's another vexing problem that will have the next president caught between the danger of leaving huge budget shortfalls on the table to deal with in the future against the need not to burden those who create wealth with more onerous tax burdens.

"We have a trillion-dollar deficit. How are we going to pay for it? He's walking into a big mess," says Chapin Hill's Boyle. "How much more can you tax a certain class of people without slowing the economy down even further? It's not an easy situation."

In fact, rather than raising taxes the next president may have to think about doing just the opposite.

"The next administration will have to seriously consider how to stimulate the economy through business tax cuts," Swiss Re's Karl says.

5. Be Patient

Part of not overdoing economic solutions, of not pushing the panic button on taxes, of making sure partisan arrogance doesn't result in gridlock, will be allowing enough time for the current economic situation to unwind.

But patience is a commodity often in short supply in Washington's halls of power, but will be extremely valuable in the days ahead.

 

"It takes time to rebuild confidence and trust," Karl says. "This is an unprecedented lack of confidence and trust in the financial community. How to bring that back and get the liquidity flowing is non-trivial. Part of it will be time, part of it will be a bottoming out of the housing market."

Lawmakers and the president will require time to sort what's been effective in terms of governmental policy directed at the economic problems.

That process will need to continue as the economy and market fight their way back to health.

"What needs to be done is to fine-tune the rescue/bailout and analyze what's working and what isn't, because we have very little time to address these problems when they happen," Tanous says.

"The first action is to get this from life-threatening to serious, and when we get to that point we can start thinking about reality and recovery."

For more stories from CNBC, go to cnbc.com.

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