The Irish Independent reports that even as AIB presided over an embarrassing profit warning yesterday in the face of a sharp deterioration of the quality of its loan book, the first lender to address the market following the Government guarantee sought to convey a sense of strength.
The group said it saw no "material outflow" of deposits as the banking system stared into the abyss before the guarantee was announced at the end of September. It also stuck doggedly yesterday to the line that it will not have to resort to shareholders for extra cash as bad loan losses spike over the next few years.
The markets had been screaming for clarity on AIB's loan quality since Bank of Ireland painted a pretty bleak picture of its smaller residential development loan book two months ago.
Executives
AIB showed yesterday that its executives have been busy with their red pens of late. The group now expects to write off up to 7.8pc -- or €835m -- of its €10.7bn residential development loans between this year and next as it takes an aggressive swipe at the most problematic part of its €137bn loan book.
It now expects to book €950m of loan provisions this year -- with €700m coming from its Republic of Ireland division.
The group does not expect a "meaningful recovery" in the housing market until the first half of 2011. AIB sees the value of undeveloped land, which accounts for €7bn of loans, falling 40pc from their peak; completed houses (a €3.7bn portfolio) should tumble 30pc.
Eugene Sheehy, group chief executive, said rates of decline vary greatly throughout the country. "There's no doubt at all that the larger urban areas where you have infrastructure such as transport, hospitals, schools and reasonable size business are performing very much better than marginal rural areas," he said.
Residential
While AIB highlighted that €2.5bn of residential development loans are now "on watch", meaning they are being intensively managed, about €4.6bn of this loan book should "remain very resilient" through the downturn. A further €3.4bn "is currently deemed satisfactory".
Before new accounting rules were introduced a few years ago, banks had been able to set aside large provisions to build up sizeable reserves for when the economy hit a hurdle and loans turned sour.
But under International Financial Reporting Standards (IFRS), adopted in 2005, they were largely restricted to setting aside 'specific' provisions for bad debts as they occurred. Salting away 'general' provisions for a rainy day is difficult under the new regime. "But once something happens like events over the last six months -- the change in the Irish economic position and collapse of the world banking system -- you have a very specific event that you can hang [general provisions] on," said John O'Donnell, group finance director.
The group is throwing as much of the kitchen sink as possible at the problem. Of the 0.75pc bad debt charge it plans to take this year, only 0.45pc refer to specific cases with the rest made of general provisions. It hopes the stock of €600m in general reserves will cushion the blow over the next few years.
While UK and European banks are moving towards tier one capital ratios of over 8pc following a raft of government bailouts, AIB believes that a 7pc ratio is sufficient for its banking model, which has minimal exposure to 'toxic' subprime assets.
Cycle
"It's not just what [capital] we go into the cycle with, but rather what capital we emerge from the cycle with,"said O'Donnell. "We think that we will emerge with one of the strongest core tier one ratios of any bank in these islands or, indeed, in Europe."
Despite the grim trading update, AIB sought to sell a position of strength yesterday. It will know whether the debt markets have bought the line when it goes about refinancing €4.9bn of term debt that is due to mature next year.
The Irish Independent also reports that the European Central Bank is expected to cut its main lending rate today by 0.5pc in a move that will put €250m into the pockets of homeowners.
The main ECB rate is expected to fall to 3.25pc today and to 2pc, by mid-2009, according to Bank of Ireland economist Dan McLaughlin.
A 0.5pc cut would reduce the monthly repayments on a €300,000 tracker mortgage over 30 years by €90 -- and follows a similar cut last month.
Dr McLaughlin estimated that €100bn in mortgage debt was taken on between 2002 and 2007, with 60pc of these home-loans being trackers, where the rate tracks the ECB rate.
Every 0.5pc cut in ECB rates reduces repayments on trackers by €220m. Assuming another €30m saved by cuts in standard variables -- where rates are not always cut when ECB rates drop -- household repayments fall by €250m for each 0.5 point ECB rate cut.
Ulster Bank, meanwhile, has come in for sustained criticism for being tardy in passing on last month's cut to tracker customers -- who told the Irish Independent the bank was quick to pass on ECB rate rises, but would not pass on the October 8 cut until December 1.
A spokeswoman for Ulster Bank and First Active said people due to pay their tracker mortgage early in the month would have the rate cut passed on in mid-November, but those whose repayments fell on the first of the month would not have the October ECB rate cut passed on until December 1.
Fianna Fail deputy Chris Andrews, who is convenor of the Oireachtas Finance Committee, also strongly criticised ICS Building Society and Permanent TSB for failing to fully pass on the October ECB reduction.
A spokeswoman for Bank of Ireland, and its subsidiary ICS Building Society, admitted that the group was only passing 0.3 points of the October cut to customers with standard variable LTV (loan to value) mortgages.
"We are reducing our variable LTV . . . independently of the ECB move, as our LTV based products are priced off the cost of funds,"she explained.
The Irish Times reports that unemployment soared again last month after the number of people joining the Live Register of unemployment benefit claimants in October swelled by a record amount.
The number claiming jobseekers' benefits rose by 15,800 to 260,300, its highest level since March 1997. The number of claimants is now 60 per cent higher than it was this time last year.
The Central Statistics Office (CSO) now estimates that the unemployment rate has reached 6.7 per cent, up from 6.3 per cent in September.
In percentage terms, the month-on-month, the jump in claimants is the highest since January 1975. The data is made more ominous by the fact that the number of unemployment benefit claimants usually drops in October as third-level colleges reopen for their autumn semester.
Economists warned yesterday that the rapidly weakening labour market would get worse before it gets better.
"We have not yet reached the point at which that downward momentum slows,"said Davy Research economist Rossa White, who said the bad jobs figures would have negative implications for retail sales.
More subdued consumer spending next year will drag the economy further into recession.
It is "only a matter of time" before the Live Register, which also includes part-time and casual workers who are entitled to jobseekers' benefits, breaks through the 300,000 mark, according to Bloxham economist Alan McQuaid.
More than 11,000 - about 70 per cent - of the total monthly increase in claimants in October were men, indicating that the male-dominated construction sector is still shedding jobs at a fast pace.
But the 4,800 rise in female claimants is the largest monthly rise in the year so far, noted Ulster Bank economist Lynsey Clemenger, indicating that the labour market's malaise has spread to the services sector.
Young people with limited work experience or those who were trying to join the workforce were being hardest hit by the turn in the jobs market, said Michael McDonnell, director of personnel managers institute CIPD.
The Government said the increase in unemployment was "regrettable but not surprising" given the downturn in the economy. In a statement, it said strenuous efforts were being made to identify job creation opportunities and provide re-skilling programmes for unemployed people.
"The department continues to monitor and review the conditionality and operation of the employment support schemes with a view to providing the best possible service to its customers and to targeting limited resources at those who are most in need," the statement said.
However, the Opposition has accused the Government of throwing in the towel on the issue.
Labour Party leader Eamon Gilmore said the Budget did not contain a single significant initiative to deal with unemployment except to make it more difficult to qualify for jobseekers' benefit and to restrict its payment, while Fine Gael spokesman Leo Varadkar said one person was losing their job every three minutes.
The Irish Times also reports that RTÉ IS to make cuts of over €50 million to its budget next year to avoid a deficit, its director general told a Dáil committee yesterday.
The cuts, which total 10 per cent of its operating costs, will include shelving plans to bring Diaspora TV to the UK next year.
Cathal Goan told the Dáil Committee on Communications, Energy and Natural Resources the station took €50 million plus out of the planned budget for 2009 to ensure it would not go into arrears. Cutting the diaspora TV project, which was to be provided to Irish people abroad via Freesat in the UK, would save €2 million a year.
The station had anticipated a budget surplus of €11 million this year, he said, but was now hoping to break even in 2008 by making cuts worth €27 million. This would involve reductions in expenditure in every area, he said.
RTÉ had lost considerable income from TV advertising, virtually all in the last four months of this year, the committee was told, and very many painful decisions had already been made.
RTÉ's chief financial officer, Conor Hayes, told the committee "gain sharing" had been replaced by "pain sharing".
Next year, they hoped €21 million would be saved through personnel savings, Mr Hayes said. Over €10 million could be saved through a freeze on increments and a postponement of the implementation of the national wage agreement, he said, and this was being discussed with unions.
Senior managers had already agreed to a wage cut of up to 17.5 per cent and negotiations were underway with 360 staff at management grade for cuts of between 5 per cent and 17.5 per cent. Some €29 million in savings would be made across the board through trimming in all programmes.
"There is no area that is being left untouched," Mr Hayes said.
Clare Duignan, director of programming at the station, said they were trying hard not to remove programmes from the schedule, but were asking people if they could make cuts in certain areas such as on travelling out of Dublin or on the number of shooting days required for a programme. From this month, there would be a cut in the numbers of floor staff working on the Late Late Show and one camera operator would be lost from Tubridy Tonight, she said.
However, plans to introduce a digital television service would go ahead at a cost of €111 million. Mr Hayes said the station would be putting together an entire transmission structure and would have to borrow "for the first time in 20 years" to fund it.
By next May, 69 per cent of the population would have digital coverage, he said, and by June 2010, the figure would be 89 per cent.
The project will not be completed countrywide until the end of 2012, because of an agreement with the BBC not to introduce the new technology in Border areas until the British stations are ready.
Once the technology is in place, householders will have to buy set-top boxes to receive transmissions.
Mr Hayes said he hoped these could be brought in for under €50. He told the committee that RTÉ would broadcast simultaneously on the current analog system and on digital until the end of 2012.
The Irish Examiner reports that Taoiseach Brian Cowen has admitted the global financial turmoil and its impact on Ireland could worsen, but rejected suggestions he came to office at the wrong time.
“You become taoiseach on the basis of other events. There’s never a wrong time to be taoiseach. It is a great privilege to be taoiseach — for however long. You don’t pick your time to be taoiseach,” he said.
Mr Cowen admitted his popularity had suffered in recent months, but said other world leaders were in the same boat. “I’m in the very same position as other people in my position in other countries. None of them are exactly top of the popularity charts,” he said.
Speaking in an interview in Hot Press magazine, Mr Cowen once again warned that the economic outlook was likely to get worse before it gets better.
“There’s financial turmoil out there, from which we cannot go on thinking we are immune. There are some countries facing very serious problems — look at what happened in Iceland and look at how the IMF (International Monetary Fund) had to provide a package for Hungary, which is a member of the European Union,” he said.
“There are similar proposals for the Ukraine this week. The Korean economy is under severe pressure this week and its currency dropped 30%. Every economy seems to be going into recession — and we have to make adjustments accordingly.”
In addition to the painful budget measures, there would have to be further cutbacks next year, he indicated. “If we try to ride out this recession as if it is not affecting us or shouldn’t affect us, then we won’t be competitive, we won’t be able to increase our exports, we won’t be able to generate the wealth to get us back on track.
“As I say, this isn’t the full process of adjustment by any manner of means.”
The Government would borrow €13 billion to €14bn next year, but this was on the basis of continuing to fund key capital projects, he said.
The Financial Times reports that the number of cranes adorning the London skyline has fallen by a fifth in just six months as the financial downturn chokes off corporate demand for newly built office space.
Developments under way have fallen by more than half in a year, from 46 in the third quarter last year to just 17 in the past three months. But a report on Thursday warns that London is still facing a huge oversupply of empty office space in the next few years.
Despite the slowdown in new starts this year, more than 12m sq ft of office space is still under construction, according to the Crane Survey from property consultancy Drivers Jonas out next week, equivalent to about 25 new blocks the size of Swiss Re’s “Gherkin” tower in the City of London.
There is already about 15m sq ft of office space lying empty in central London, and vacancy rates in parts of the capital such as the City are set to rocket as banks and other financial institutions look to reduce staff and freeze relocation plans.
Rents have seen worse
The London office market is facing a tough few years as a rising supply of developments meets falling demand from occupiers, but most people within the industry still expect conditions to be better than the last deep recession in the early 1990s .
Rents in the Square Mile bottomed out at £35 per sq ft in 1992, with a vacancy rate of about 19 per cent, according to Jones Lang LaSalle – significantly worse than predictions about the extent of the current downturn. The property consultancy forecasts that rents will fall to £47.50 for the best City office space by 2010. The vacancy rate is forecast to rise to around 12.2 per cent next year from about 6 per cent now, but to improve afterwards as the development freeze meets a recovery in the financial markets.
London’s West End is similarly expected to fare better than in the last big crash, when rents dropped to £40 per sq ft and vacancy rates went above 10 per cent. During the present cycle, Jones Lang LaSalle predicts that rents will bottom out at £89.50 by 2010, with a vacancy rate of 6.8 per cent. They are currently about £110.
In the Square Mile alone there is 5.6m sq ft of space under construction without a waiting tenant, and the majority of this will be completed in 2009. The larger speculative schemes include Minerva’s Walbrook development, the Heron tower in Bishopsgate and British Land’s Ropemaker Place.
The impact of the global credit crisis on the financial services sector means rents in the City of London are already tumbling – they have fallen to about £57 per sq ft from a peak of £65 per sq ft last summer.
Given the additional problem of an increase in so-called grey space – where banks and other occupiers attempt quietly to sublet their own properties as staff numbers fall – some agents predict rents could slip nearer £40 per sq ft before the end of the economic downturn.
Drivers Jonas said it did not expect any significant new starts “for some time” in the City. The report also warns that other markets across London will not escape the downturn as economic conditions and the fallout from the financial crisis weighs on take-up of office space during the next 12 to 18 months.
The West End is the only area to record an increase in new starts, up from six to nine in the past six months. While at less risk of overdevelopment, the report warns Mayfair’s reliance on hedge funds means rents will fall from record levels as this source of demand dries up. Other markets such as Canary Wharf, the Southbank and King’s Cross have seen no new commercial building in the past six months. Canary Wharf, however, could still be “caught out by its Achilles’ heel – a heavy reliance on the American financial sector”, according to the report.
“The demise of two of its key tenants, Bear Stearns and Lehmans, could put a huge amount of top quality space on to the market,” it warns.
Anthony Duggan, partner at Drivers Jonas, said:“The short-term outlook is one of oversupply with a consider-able volume of speculative space being delivered into the market over the next 15 to 18 months at a time of weak demand. However, the report clearly shows that new development starts in London have come to a grinding halt.”
The report says is developers are walking away from new projects, indicating they have a more realistic grasp of the level of demand in a downturn.
The FT also reports that the German government has abandoned its goal of balancing the federal budget by 2011, one of the central objectives of chancellor Angela Merkel, Berlin conceded on Wednesday as the cabinet endorsed a smaller-than-expected fiscal stimulus to prop up the country’s decelerating economy.
The bill introducing the growth-boosting measures no longer mentions a date for balancing the budget, stating instead that the goal should be achieved “as soon as possible”. An earlier draft of the bill had mentioned 2013 as a new target.
The softening of Ms Merkel’s fiscal objective – Germany has not had a balanced federal budget for 40 years – reflects less the cost of the fiscal package, which is modest at €12bn ($15.7bn, £9.7bn) over the next two years, than fears that the rapidly deteriorating economic outlook could blow a hole in the government’s tax revenues.
Official tax estimates for 2009, released on Wednesday, showed expected tax receipts for the federal government falling by €2.2bn compared with the previous estimate, published in May. Officials said this figure was open to question, however, given the high level of uncertainty regarding growth next year.
The modest fiscal package unveiled on Wednesday – which Ms Merkel described as “a bridge” to the next recovery – suggests the government expects only a temporary slowdown in the economy, followed by a rebound towards the end of 2009.
Yet it also reflects disagreements in the coalition over how best to support growth. The adoption of the package was delayed by a week as economics and finance ministry struggled to reach a compromise – the former was pushing for tax cuts, the latter for public investments.
“It would definitely be wrong to call this a Keynesian package,”said a government official.“It is more an incentive to encourage private-sector investment.”
The government said it expected the measures to generate €50bn in investments, largely thanks to the introduction, for a period of two years, of more generous amortisation rules for companies, which will now be allowed to write off 25 per cent of their capital goods investments in the first year.
Tax subsidies for home renovation and insulation work will be extended, while the car industry, which has seen domestic and foreign orders plunge in October, should benefit from the abolition of a tax on car purchases for one-year – extended to two years for low-emission models.
The government also instructed KfW, the state-owned development bank, to provide up to €15bn in new loans to companies that struggle to secure financing from their banks as credit conditions tighten because of the financial crisis.
The measures include €5bn in new funds for infrastructure investments in the transportation network and for financially weak municipalities and regions. Employees who are temporarily suspended by their companies, though not dismissed, because of the economic crisis should receive benefits worth two-thirds of their salaries for 18 instead of 12 months currently.
The New York Times reports that the dismal state of the economy helped decide Tuesday’s presidential election. And it almost certainly will dominate the early days of the Obama administration.
Few presidents have entered office with an economy in such turmoil. Reflecting worries that the worst may not be over, the stock market continues to languish, with a 5 percent decline on Wednesday, leaving it 35 percent below its peak last fall.
The reasons are myriad: the financial system, though back from the brink, remains deeply troubled. Housing may no longer be in free fall, but plummeting values and rising defaults have impoverished many homeowners and burdened states with widening budget deficits. The once-mighty auto industry is on the verge of implosion.
Consumers who piled up credit card debt are pulling back, a major concern because their spending helped power economic growth in recent years. And with unemployment widely expected to increase to 8 percent or higher, from 6.1 percent, consumers are likely to tighten their belts even more.
Moreover, with upward of $1 trillion already pledged by the federal government to bail out the banking and housing industries, financing a growing deficit to address the problems could be difficult — and saddle the Treasury Department with high levels of debt for years to come.
But even before President-elect Obama takes the oath of office, Democrats are likely to push his agenda with urgency, because the economy otherwise could worsen quickly — complicating the task ahead. “The cost of allowing an economy to flounder is very high in lost output and rising unemployment,” said James Glassman, chief domestic economist at JPMorgan Chase & Company.
Here are some of the crucial issues that economists say will test the new administration, and how it might address them.
ECONOMIC STIMULUS: Obama Is Likely to Act Quickly
Quick passage of an economic stimulus package is high on Mr. Obama’s agenda, even more pressing for the moment than the tax package that he promoted repeatedly during his campaign.
Congress could act on the stimulus this month — but only if the president-elect signals that he favors a preinauguration special session, Congressional Democrats said. Legislators would more than likely adopt some relatively inexpensive measures rather than try to pass a much larger outlay that the Bush administration might oppose. After he takes office, Mr. Obama is likely to ask Congress for an additional economic lift, those in his camp say.
Before the election, the party leadership in Congress discussed a lame-duck session to take up a bill that would pump $150 billion to $200 billion into the economy. That would follow the $168 billion stimulus, most of it in rebate checks mailed to tens of millions of Americans earlier this year.
Those checks lifted spending a bit. But they came before the credit crisis struck in force in early September.
“We need a package that matches the problem as it exists today, and in my view that means at least $200 billion a year for a couple of years,” said a senior member of the House Financial Services Committee staff.
As private sector spending dries up, the case builds — among Republicans as well as Democrats — for the government to jump-start the economy.
“Right now, the economy is in a really deep recession,”said Kevin Hassett, director of economic policy studies at the American Enterprise Institute and a senior economic adviser to John McCain.
Like many Republicans, he wants the stimulus — whatever its size — to be a cut in tax rates, not an increase in public spending. The Obama camp also supports a tax cut, possibly front-loaded so that refund checks would go out before tax returns are filed in April. But that would be enacted after the inauguration.
As for immediate relief, Obama aides say, a lame-duck session of Congress could pass a $60 billion package of additional outlays for food stamps, extended unemployment benefits and subsidies to the states to minimize their spending cuts.
The big question is “should the Democrats risk a Bush veto in a lame-duck session,” said Jared Bernstein, a senior economist at the Economic Policy Institute and an Obama adviser, “or should they wait for Obama to take office in January to get a more effective recovery package.”
As a candidate, Mr. Obama said he would extend the Bush tax cuts of 2001 and 2003 for families whose income is under $250,000 a year. He pledged to add new tax breaks for homeowners who did not itemize deductions and more breaks for savings accounts, college costs and farming. He said he would change the alternative minimum tax so it did not affect the middle class.
To raise revenue, Mr. Obama said he would repeal the Bush tax cuts for people in the top two marginal tax brackets before their scheduled expiration at the end of 2010, and raise taxes on capital gains and dividends.
His tax plans are reminiscent of Clinton administration policies that increased taxes on the affluent but gave targeted breaks to others. He would also repeal corporate loopholes and retain an estate tax.
The nonpartisan Tax Policy Center estimated that the Obama plans would reduce revenues by as much as $2.9 trillion over a decade. The center said Mr. Obama’s incentives could strengthen the labor market, while giving further breaks to “an already favored group — seniors.”
MORTGAGES: A Pledge to Aid Homeowners
Mr. Obama has pledged to help hard-pressed homeowners, but he will have to move quickly to forestall a new wave of foreclosures.
Some in Congress favor direct mortgage relief, but others worry that the cost — on top of the bank bailout — will be too expensive.
Judging by positions laid out in his campaign, Mr. Obama might seek to change personal bankruptcy laws to help people avoid losing their homes, a step that the Bush administration and the mortgage industry have resisted.
Like other Democrats, Mr. Obama wants to empower bankruptcy judges to ease the terms of home loans on primary residences. Under current laws, judges are prohibited from reducing the balance on those mortgages but can change loans backed by commercial property or second homes.
The shift, proponents say, would help keep millions of people in their homes and ease the broader housing crisis. Many mortgage companies and Wall Street investors, however, might suffer greater losses on the loans and securities backed by them.
The Bush administration and many lenders have argued that changing the bankruptcy law would ultimately drive up mortgage rates, worsening the downturn in the housing market. They also argue that it would violate the sanctity of contracts and drive investors away from the mortgage market.
But with more comfortable majorities in both houses of Congress, Democrats could move quickly. Republicans in the Senate could try to block a change through a filibuster.
Mr. Obama has generally supported the $700 billion financial rescue package that Congress and the Bush administration negotiated and approved last month. He also endorsed the move by the Treasury secretary, Henry M. Paulson Jr., to redirect $250 billion of that money to recapitalizing the nation’s banks.
But Mr. Obama has not specifically said how he would spend the remainder of the money or whether his administration would acquire loans or securities as Congress initially intended. (The Treasury has made no acquisitions yet and it is unclear if it will do so before the Bush administration leaves office in January.) Mr. Obama has said that the government should help homeowners refinance troubled loans that can be saved.
FEDERAL REGULATION: Tighter Reins on Wall Street
Mr. Obama called for reorganizing the financial regulatory system months before the housing and credit crises spiraled into a debacle. He outlined six principles, but offered few details.
He said one major priority would be to consolidate the financial regulatory system. He promised to streamline the alphabet soup of agencies, from the Federal Reserve to the Securities and Exchange Commission, that have enforcement powers.
But he has not said which agencies he would eliminate or merge.
Mr. Obama has also pledged to impose stronger liquidity, capital and disclosure requirements on financial institutions, and to subject unregulated financial businesses — like hedge funds, mortgage brokers, derivatives traders and credit-rating agencies — to federal oversight.
Mr. Obama promised he would increase penalties for market manipulation and predatory lending, and create a new financial-market oversight commission to review conditions regularly and advise the president and Congress about potential risks.
In one of his campaign-ending speeches on Monday, Mr. Obama said, “The last thing we can afford is four more years where no one in Washington is watching anyone on Wall Street because politicians and lobbyists killed common-sense regulations.”
He returned to that theme on Tuesday night after he clinched the election, signaling that the financial industry should brace itself for a regulatory crackdown. Some Democratic lawmakers already have held hearings on what a new financial regulatory landscape would look like.
AUTO INDUSTRY: In Detroit, No Cash, No Credit, No Time
General Motors, Ford Motor and Chrysler are rapidly running out of cash in the worst sales market for new vehicles in 15 years. Both G.M. and Ford are expected to announce billions of dollars more in losses for the third quarter on Friday, and the threat of bankruptcy will grow without some form of federal assistance.
The Bush administration has so far denied G.M., Ford and Chrysler any aid from the $700 billion financial rescue fund or any other new source of assistance. It will, however, pay out the $25 billion in low-interest loans for cleaner cars sooner than had been promised.
The pleas for help from the Big Three are growing louder. “This is really a severe, severe recession for the U.S. auto industry and something we cannot sustain,” said Michael DiGiovanni, G.M.’s chief market analyst.
Mr. Obama has promised to meet soon with the chief executives of the Big Three to discuss adding another $25 billion in aid to the loan program for more fuel-efficient vehicles.
Democratic leaders in Congress are also considering ways to inject new cash into Detroit as quickly as possible. Michigan’s ranking Democrats, Senators Carl Levin and Representative John D. Dingell, will be instrumental in crafting any proposed legislation.
The aid could come in the form of government-backed, low-interest loans, similar to the bailout package for Chrysler in 1979. In addition, the Congress and Mr. Obama could tap the $700 billion financial assistance fund to buy up bad car loans and help automotive lenders get credit flowing to consumers again.
One potential hurdle for aid, however, is the proposed merger of G.M. and Chrysler, which is majority-owned by the private equity firm Cerberus Capital Management. The deal, if completed, would cost thousands of jobs and has so far found little support in Washington.
HEALTH CARE: An Overhaul Will Have to Wait
Democrats’ campaign rhetoric aside, few health care analysts expect the new president and Congress to undertake a sweeping overhaul of the health care industry any time soon.
The more pressing needs of a faltering economy make it unlikely that big changes in health care can quickly make their way to the top of the new agenda. But analysts say the newly empowered Democrats are likely to abandon some of the health care positions staked out by the Bush administration, particularly when it comes to Medicare.
Private insurers’ role in Medicare “is target No. 1 for Democrats,” said Robert Laszewski, the president of Health Policy and Strategy Associates, a consulting firm in Alexandria, Va.
Under the privatization approach of the Bush White House, commercial insurers now provide coverage to about a quarter of the nation’s 44 million Medicare enrollees — at a cost to the Medicare program of about 15 percent more than when the government provides the benefits directly. With the threat of a Bush veto removed, Congress will now be looking to shrink or end those industry subsidies to save Medicare money, Mr. Laszewski said.
The president-elect and the Democratic Congress also are likely to give Medicare the power to directly negotiate with pharmaceutical companies — a change that the Bush administration has resisted — though the impact on prices would depend on the authority Congress grants.
Analysts also expect the Democrats to seek closer scrutiny of the drug industry through the Food and Drug Administration, an agency that has been stretched thin in recent years.
And many analysts expect Congress to take some steps to address the increasing cost of medical care. High on the list might be covering more children under the federally subsidized State Children’s Health Insurance Program. Congress might also try some relatively inexpensive other changes, like pushing harder for the adoption of electronic health records or requiring hospitals and doctors to report publicly both the cost and the outcomes of their care, to enable patients to comparison-shop.
TECHNOLOGY: To Shape Policy, a Cabinet Voice
Technology companies have long argued that they need the best and brightest engineers if they are going to compete in the global economy. President-elect Obama has endorsed the industry’s call for raising the number of H-1B temporary work visas, which are available now to only 65,000 skilled foreign engineers each year. (The visas are all claimed within minutes.)
But even with a sympathetic ear in the White House, getting Congress to agree to more visas could present a major challenge given the probability that, in a recession, public sentiment will be heightened that foreigners are taking Americans’ jobs.
In the meantime, the tech industry — which has grown much more politically active in recent years — will greet the new president with a list of other wishes. One is that he push policies to spread high-speed Internet access, which provides a conduit for e-commerce, online advertising and other Web-centric business models. The industry argues that the United States has fallen to 16th in the world in terms of broadband penetration, frustrating consumers with a lack of services — like the high-speed downloading of movies — and the still-choppy performance of their Internet connections.
The industry also hopes Mr. Obama will stand behind his stated support of “net neutrality,” which is a government requirement that telecommunications companies provide Internet content providers equal access to delivery lines.
Such tech policy could fall to a chief technology officer, a cabinet position the president-elect has pledged to create.
ENERGY: An Agenda Faces Possible Delays
An Obama presidency could mean a sharp shift in the nation’s energy policies, with particular emphasis on conservation and renewable power. But some of the candidate’s bolder proposals, like a global warming bill, may have to wait for the economy to recover, according to analysts and energy experts.
High energy costs and concerns about global warming have heightened the sense of urgency for a broad policy that tackles both the nation’s oil use and its energy-related carbon emissions. As a candidate, Mr. Obama shifted from his initial opposition to expanding offshore drilling, but his core message remained that the United States should reduce its oil consumption, encourage energy conservation and efficiency, and develop low-carbon forms of energy.
“There is an opportunity to address energy needs in a way that hasn’t been possible for decades,”said Daniel Yergin, the chairman of Cambridge Energy Research Associates. “It almost feels like we’re picking up from where we were in the 1970s.”
But, he added, “resources are going to be constrained, and spending on energy will have to compete for dollars with spending on the financial crisis and two wars.”
The Obama energy plan called for investing $150 billion in clean energy technologies over the next 10 years, creating green jobs and ensuring that a growing share of the country’s electricity came from renewable sources. He also proposed an aggressive mandate over the next four decades to cut greenhouse gas emissions, which cause global warming.
Given the size of the Democratic majority, an Obama administration is also likely to impose stricter environmental regulations and place higher taxes on oil companies than the Bush administration did.
TRADE: Cooperation Fades, Protectionism Rises
What consensus there was on international trade seemed to evaporate with the failure of world trade talks this summer. Indeed, with the world on the brink of a global recession, led by the United States and Europe, the fear of a rise in protectionism grows.
The first test of sustaining international cooperation will come on Nov. 14 and 15, long before Mr. Obama takes office. Leaders from 20 major countries will gather in Washington with President Bush to embark on an effort to rewrite international financial regulations — an undertaking some liken to a latter-day Bretton Woods conference.
Whether or not he attends, Mr. Obama will cast a long shadow.
In short order, the recession and a likely spike in unemployment are sure to put him under pressure from union supporters, as well as Congressional Democrats, to take a tougher line on trade.
“China is the issue that should be part of Obama’s trade policy right away,” said Thea M. Lee, the chief economist of the A.F.L.-C.I.O.“Part of it is sending a strong message to the Chinese government that the U.S. is not willing to tolerate currency manipulation and violation of workers’ rights.”
But China’s economy is slowing, making its leaders even less receptive to demands to allow their currency to rise. The United States will also need the Chinese to buy a good chunk of the debt being run up by the bailout of banks and housing.
It is also unclear whether Mr. Obama will pursue a renegotiation of the North American Free Trade Agreement, which he discussed in the hard-fought primaries.
“He parsed his answers in a way that suggests he understands the importance of global trade,” said Hank Cox, a spokesman for the National Association of Manufacturers.
The NYT also reports that BARACK OBAMA’s victory in Tuesday’s presidential election was in many ways a repeat of Ronald Reagan’s win 28 years ago.
His eventual success as president may depend on a willingness to do what Mr. Reagan did: be willing to combat long-term economic problems while accepting short-term pain and the risk of a prolonged slowdown that could damage his popularity.
Both men were elected in a year when a recession had severely damaged the popularity of the incumbent. In each race, the incumbent party’s candidate tried to paint the challenger as a dangerous risk.
Mr. Reagan was portrayed as a right-wing actor with extremist views; Mr. Obama as an inexperienced liberal who was weak on national defense and had “palled around,” as Gov. Sarah Palin put it, with a terrorist.
In each case, it appeared that the presidential debates helped to persuade voters that the candidate was an acceptable choice.
Mr. Obama will enter office with the United States, and most developed countries, in a recession. What had been a slow downturn accelerated in September when the financial crisis worsened and the investment bank Lehman Brothers was allowed to collapse. Businesses and consumers slowed their spending drastically.
Stimulating the economy will almost certainly be at the top of the economic agenda, and some action is likely this year by the lame-duck Congress. Mr. Obama will obviously be in a position to help shape that legislation.
In doing so, he would be wise to keep in focus the longer-term problems that need to be solved, and to try to stimulate the economy without worsening those problems. They include severe budget deficits, crumbling infrastructure, accelerating costs for health care and a housing crisis marked by falling prices and rising foreclosures.
The financial system has been kept afloat with the aid of government bailouts, and most mortgage loans — in a country that sees itself as a bastion of free market capitalism — are being made or guaranteed by the federal government or its agencies.
Unemployment is rising, and the figures for October — to be released Friday — are expected to show a sharp increase.
Some have suggested that Mr. Obama should push for infrastructure spending, to repair roads and bridges and sewer systems, as a way to stimulate the economy and provide jobs while attacking long-term problems. The tax rebates earlier this year provided a temporary lift to spending, but the effect faded almost immediately, and a repeat of that tactic could increase the deficit without much offsetting benefit. But an infrastructure bill could easily degenerate into a pork-laden measure that benefits regions with powerful lawmakers, rather than serious needs.
How to cushion the foreclosure crisis will be a major issue for Mr. Obama and the increased Democratic majorities in Congress. Doing that without creating unintended and undesirable side effects could be difficult. Measures that delay the adjustment in house prices could postpone the day that the housing market is able to recover. Measures that help those in danger of losing their homes could encourage some who are now paying their mortgages to default.
Reshaping the financial system, and its regulation, will be a major challenge in 2009, perhaps made more difficult by the fact that most major financial institutions are now partly owned by the government.
Mr. Reagan’s major challenge was soaring inflation, which his three predecessors — Richard Nixon, Gerald Ford and Jimmy Carter — had tried to confront without much success. The Carter recession was over when Mr. Reagan was inaugurated, but a focus on short-term economic growth would have made it much harder to bring down inflation.
The course Mr. Reagan adopted was to cut taxes at the same time he allowed a Federal Reserve chairman appointed by Mr. Carter — Paul Volcker — the freedom to attack inflation by sharply raising interest rates.
Mr. Volcker, now an adviser to Mr. Obama, is remembered as an economic hero and has been suggested as a possible Treasury secretary in the Obama administration even though he is 81 years old.
But in the early 1980s Mr. Volcker was blamed for causing a severe recession that began early in Mr. Reagan’s tenure and continued through November 1982. The Republicans suffered losses in the 1982 midterm elections, and Democrats thought they were in good shape to win back the White House in 1984.
Instead, the economy was clearly in recovery by then, and inflation was down sharply. Mr. Reagan was re-elected in a landslide, and was so successful that he became the first president since Calvin Coolidge to leave office and be succeeded by a member of his own party, George H. W. Bush.
George W. Bush, the son of the elder Bush, came into office determined to follow the Reagan course and not make the mistakes that his father had made, which led to his being a one-term president. He too confronted a weak economy early in his administration, and like Mr. Reagan he was able to push through substantial tax cuts as a way of stimulating the economy.
But unlike Mr. Reagan, who later allowed taxes to be raised to combat soaring budget deficits, the younger Mr. Bush refused to contemplate such an action. When the economy was booming, he saw no need to apply the brakes, and neither did the Federal Reserve chairman he had inherited, Alan Greenspan. Had they been willing to do so, the current bust might have been avoided, or at least been much milder.
Like Mr. Reagan, Mr. Obama will have to confront taxes in his first year. The Bush administration’s large tax cut in 2001 was temporary — a strategy that under Senate rules made it possible to push through the cut without having to win Democratic votes — and needs to be changed in 2009. Had Mr. Bush chosen a bipartisan approach, the tax cut would have been smaller, and the new Congress would not have to pass a tax bill immediately.
In passing a tax bill, the Congress and Mr. Obama will have to balance the long-term deficit problem with the need for shorter-term stimulus.
Mr. Bush’s first tax bill presaged a leadership style that focused on partisanship and a determination to avoid compromise with his opponents. Mr. Obama’s first tax bill could show whether he will follow the bipartisan approach that he, like Mr. Bush before him, promised in the campaign.
The success or failure of his administration is likely to be determined by how well he deals with the long-term problems the nation confronts, not by how soon the current recession ends.
