President-elect Barack Obama faces many challenges with respect to the ailing economy. Addressing the housing and financial market crises must take precedence over the other issues on his long-run agenda.

Resident Fellow Desmond Lachman

After his hard fought election campaign, Barak Obama is soon to find out that winning the presidency was the easy part. For not since Franklin Roosevelt won the presidency in 1932 has an incoming US president been confronted with as urgent and as serious an economic and financial market crisis as we have today. This crisis will clearly not afford Senator Obama with the honeymoon that is customarily an incoming US president's due. It will also force Senator Obama to put on the back burner much of the ambitious longer-run agenda for economic change that he advocated so fervently on the campaign trail.

Over the past year, Senator Obama mapped out for the country a distinctly left-of-center longer-run agenda involving bold tax initiatives and a larger role for the state in the economy. Among his specific proposals have been higher taxes for businesses and for those in the top 5 percent income tax bracket, increased government spending in a wide range of areas, and requiring employers to either provide healthcare for their workers or to pay increased taxes to fund healthcare. In addition, Senator Obama propounded a far-reaching program to promote alternate energy sources that might wean the heavy US economy from its heavy dependence on foreign sources of supply.

On the international economic front, Senator Obama has struck the pose of someone who would be very much more willing than was President Bush to co-operate with other international leaders on the global economic crisis. Counterbalancing such willingness, however, has been his ambivalent support for free and open international markets. This could prove to be problematical at a time that a world in recession so sorely needs decisive leadership to promote the benefits of globalization.

Now that the election has been won, Senator Obama will soon realize that his longer-run vision will have to give way to the more pressing task at hand of stabilizing the US economy. For the US economy is now in the grip of its worst asset price deflation and its most wrenching credit crisis in the post-war period. The fall over the past year in US home, equity, and bond prices has already reduced US household wealth by around 80 percentage points of GDP, while bank credit is now contracting at its fastest pace over the past fifty years. Worse still, it now appears that the financial market crisis has spread to the all important US shadow-banking system, as indicated by sharply increased redemptions from the hedge funds and growing signs of insolvency in the US insurance industry.

The gravity of the economic situation which Senator Obama will be inheriting is vividly illustrated by the speed and intensity with which Wall Street's woes are now impacting Main Street. While Senator Obama's presidential campaign was entering its final phase, the economy literally appears to have hit the wall in October. Consumer confidence has plumbed new post-war lows, manufacturing production has collapsed, and auto sales have plummeted to their lowest levels in over 25 years. Last week, on cutting interest rates to 1 percent, the Fed itself noted that all components of US aggregate demand had weakened markedly and that the US economy was now facing appreciable downside risks.

Senator Obama's economic advisers, who include such economic heavyweights as Paul Volcker and Larry Summers, have to be warning him that the US economy and the US financial markets cannot wait for major remedial attention until after the January 20, 2009 inauguration date. Indeed, they have to be cautioning him about the very real danger that policy delays might result in intractable adverse feedback loops developing between a weakening real economy and worsening financial markets.

Fortunately for Senator Obama, Congress is due to return to Washington on November 17 for a lame-duck session. One would hope that as a member of the Senate, Senator Obama will be a major force in crafting a new fiscal stimulus package that is commensurate in size to the economic challenges that the country now faces. One would also hope that such a package would include measures that were fast acting and that got the most bang for the buck. Hopefully high on such a list would be measures that favored aid to state and local governments, that directly helped displaced workers, and that provided tax cuts for households with high spending propensities.

Beyond throwing his full weight behind a second fiscal stimulus package, well before his January inauguration Senator Obama must present the country with a well articulated plan to stabilize the country's housing market and to strengthen its troubled financial system. If Senator Obama is to have any hope of calming markets and allaying public fears, he will have to go beyond his lofty and at times vacuous rhetoric of the campaign trail. And judging by how quickly the US economy is fading, he will need to do so soon.

Desmond Lachman is a resident fellow at AEI.