Obama has much to do on economy before taking office

WASHINGTON -- Here's a partial list of what President-elect Obama is expected to do before taking the oath of office on Jan. 20: Craft an economic stimulus bill that can pass muster with the Bush White House. Shape a landmark, $700 billion plan to aid banks, companies and homeowners. Quickly name a Cabinet. Above all, reassure Americans as the economy tumbles toward a potentially deep recession.

Get ready for one of the most important presidential transitions in modern history, as Obama, who won over anxious voters with his calm reserve on economic issues, must now quickly make decisions that will affect businesses and consumers for years to come.

"This president goes into office with more expectations than any president I can ever remember in my lifetime," says House Speaker Nancy Pelosi, D-Calif.

Possibly not since 1932, when Franklin Roosevelt was elected in the midst of the Great Depression, has a change in administration had this economic import. Obama prepares to take office as layoffs surge 80% from a year ago, consumer spending plummets at the fastest pace since 1980, world financial markets are in turmoil and bank failures rise.

Even before Obama won Tuesday and Democrats strengthened their hold on Congress, the financial crisis was forcing Washington officials away from the Republican era of limited regulation and toward more sweeping federal intervention. Economists say the need for government action is increasing as pain spreads from Wall Street to Main Street.

"Since around mid-September, we've seen the economy really hit the skids," says Mike Englund of Action Economics. "Arguably, we are in the middle of the largest financial crisis in history."

Businesses and consumer groups expect Obama's economic team to quickly weigh in as the Bush administration debates how to shape the $700 billion rescue package. Treasury officials have prepared a briefing book for the new president and set aside staff and office space in the department.

Among decisions that could be debated by Treasury and the Obama officials: whether to aid the struggling auto industry, how to help homeowners facing foreclosure and whether to proceed with plans for financial firms to sell troubled assets to the government via an auction process.

"The president-elect doesn't have the traditional 100-day grace period. There is no honeymoon because it is so complex," says Dennis Hedlund, head of iEmergent, a forecasting firm for the mortgage and real estate industry. "Obama has to jump right into the housing issue, because it is closest to day-to-day life of Americans."

Moody's Economy.com chief economist Mark Zandi says Obama must push for Congress to quickly pass a hefty stimulus package of aid to states, public works spending, increased food stamps, extended unemployment benefits and other assistance. Democrats want to debate a bill in a rare lame-duck session this month but may have to delay action until January if they can't get support from Bush and Senate Republicans.

While financial gloom helped propel Obama to the White House, it also creates a paradox for the new president. As revenues fall and deficits balloon, it may be harder for Obama to move on longer-term priorities such as health care.

With the economy likely in recession, raising tax rates — even for the wealthiest Americans — isn't a good idea, says Michael Knoll, a professor of law at the University of Pennsylvania Law School.

Even policies that don't have a major price tag could become politically tougher. Labor unions, who backed Obama, say their priority is passage of the Employee Free Choice Act, making it easier to organize unions. James Sherk, a labor policy analyst at the conservative Heritage Foundation, calls the bill a "jobs killer and an investment killer."

House Financial Services Committee Chairman Barney Frank, D-Mass., says Obama "doesn't have the luxury of waiting" on stimulus or the $700 billion rescue plan, but says there is less urgency to dive in on rewriting financial rules. The slow economy is limiting risky dealmaking.

Contributing: Dan Reed

Some Obama priorities

Taxes: Markets could delay increases

Obama won despite strong Republican opposition to his tax proposals, which critics said would hurt small business and tilt the U.S. toward socialism.

As part of his plan, Obama wants to make the 10%, 15%, 25% and 28% tax brackets permanent but would boost the top two tax rates to 36% and 39.6%, their pre-tax-cut levels. Currently, the top tax rate for individual taxpayers is 35%. The increase would raise taxes for Americans who earn more than $250,000 a year.

Some analysts say Obama's strong showing Tuesday gives him the mandate to move forward with his tax proposals. The tax increases "were part of his platform, and it's an electoral college landslide," says Mel Schwarz, partner at Grant Thornton's national tax office.

Others argue that market developments could hold Obama back. Bob Scharin, senior tax analyst for Thomson Reuters, says the sharp stock market decline could force Obama to postpone his plan to raise capital gains rates to 20% from 15% for top earners. Critics of Obama's proposal say it would encourage investors to sell before the new rates take effect, further damaging the market.

By Sandra Block

Housing: Foreclosure moratorium coming?

Obama comes to office in the midst of the worst housing crisis since the Depression. Home prices are falling and foreclosures increasing. Growing numbers of people are making late payments on home loans, and adjustable-rate mortgages are resetting, causing surging payments for homeowners.

The Bush administration has been working on a plan to help up to 3 million homeowners.

Obama wants financial firms receiving help under the $700 billion rescue plan to institute a 90-day moratorium on foreclosures.

The rescue fund gives the administration power to buy troubled mortgages from banks and then "restructure them, allow a moratorium or do whatever they want," says Joel Naroff at Naroff Economic Advisors.

Obama has also supported giving bankruptcy judges power to write down mortgage debt, which the Bush administration opposes. "It's a good thing and appropriate if limited to loans that have already been made," Zandi says.

Lawrence Yun, chief economist at the National Association of Realtors, would prefer to see the $700 billion rescue fund used to buy loans and modify them. Permitting judges to modify loans could lead to higher mortgage rates for a new set of home buyers, he says.

By Anna Bahney and Stephanie Armour

Automakers: Obama in favor of some assistance

On the eve of the elections, the auto industry reported its worst monthly sales since 1982. Dealers need customers to come back into showrooms as soon as possible, which will happen only once consumer confidence picks up. Consumers also need better access to loans. General Motors is pushing consumers to banks because its own financing arm, GMAC, has decided it won't lend to customers with credit scores lower than 700.

The industry is seeking government funds to ride out the cratering car market. Obama has said he's in favor of some help.

"The industry is going to (the government) with its hands out because there are not a whole lot of other options," says Kevin Tynan, an Argus Research analyst.

Financier Wilbur Ross said the new administration's first move, before Obama is even inaugurated, should be to help fund a deal between GM and Chrysler. They have been working on a plan to merge for weeks but can't come up with the financing to get it done. Ross estimates the government's cost at about $10 billion.

David Cole of the Center for Automotive Research says he believes the industry will get a bailout. If not, one or more automakers could fail, killing 2.5 million jobs in the first year.

By Sharon Silke Carty

Trade:Chinese currency, NAFTA won't be easy

Obama has promised to renegotiate the 1994 North American Free Trade Agreement and get tough with China over its undervalued currency, which gives its exporters a price advantage in world markets. Neither will be easy.

If the U.S. reopens NAFTA, trade partners Mexico and Canada are sure to raise their demands for improvements. Cracking down on China is complicated by U.S. dependence upon Chinese purchases of U.S. Treasuries to finance government borrowing.

The president-elect will also be buffeted by competing economic and political pressures.

On the one hand, there is widespread public sentiment that expanded trade liberalization costs jobs. Yet, exports have been a rare bright spot in an otherwise bleak outlook this year, providing almost all of the economy's forward momentum. Obama must address public angst without choking off beneficial cross-border deals.

"The public is nervous and a little worried about the ability of the country to compete and feels pressured by the rise of other countries," said Edward Gresser, a trade expert at the Progressive Policy Institute, a Democratic-leaning think tank.

Two things are virtually certain in an Obama administration: stronger emphasis on enforcing existing trade deals and expanded efforts to help workers displaced by trade agreements.

By David J. Lynch