Two months in office by 20 March, President Barack Obama had run into a host of problems with his radical moves to bring about a transformational change for America - in its economy, in political governance and in reshaping relations with the rest of world for 'a future of peace and dignity.' True to his inspiring inaugural address, which minced no words about the challenges of 'Remaking America' with an economy in deep recession and soaring unemploy-ment, Obama put through a $787-billoion Economic Recovery and Reinvestment Plan to create or save 3 to 4 million jobs. Republicans voted against it. Then came with his $ 3.6 trillion budget to promote the key priorities - healthcare reform, education and carbon-free energy – he had campaigned for, a bigger bugbear for Republicans.

New era of fiscal responsibility

Tax increases for the rich (from 2011) and cuts for the middle classes and income lifts for the poor are designed to redistribute incomes, reversing the rapid rise in economic inequality of the last three decades.
Obama sees his budget as one ushering a 'New Era of Fiscal Responsibility' though the radical shifts in priorities it embodies will be hard to sell even to a large section of bewildered Democrats, let alone a determined Republican opposition. These, according to budget framers, are achievable in a prudent framework with a re-writing of the tax code, reducing health costs and expanding coverage and raising billions of dollars through carbon permits for polluting industries. Veteran observers note that Obama is taking responsibility for delivering the most ambitious agenda for a new President within weeks of assuming office.

All affected interests – doctors, insurers and energy-intensive indus-tries – are now ranged against the reforms, and as Congressional committees went into scrutiny of the proposals, Obama promised to consider broadly acceptable details in health and energy sector reforms. Republicans will not have anything to do with this budget. They see it as an aggressive expansion of the Federal government and pushing America into deeper debt. There are those, including a section of Democrats, who feel that Obama is trying to do too much all at the same time and might slip up. Obama and his advisers are mobilising citizens' strong backing for the budget and the President has told Congressional leaders, mainly Republicans, that if they object to any specific proposal, they should propose constructive and alternative solution. Democrats are lining up to back his spending plans that would reflect his priorities - health care, energy, education and fiscal discipline.

‘Outrageous, distasteful’ bonuses…

The President's popular rating remains undiminished though there is considerable anger with the way financial firms getting tax-payer funds are giving away large bonuses to their executives. Obama has repeatedly called such behaviour as 'outrageous' and has decided to stiffen conditions for providing capital to banks in future. The latest episode is in the world's biggest insurer AIG which was bailed out four times for a total of $ 170 billion dollars in exchange for 80 per cent of its preferred stock. Its CEO admitted as 'distasteful' the pay-out of $ 165 million as bonuses to the executives under contractual obligations.

He assured Congressional interrogators that the company was working hard on the restructuring plan and he believed it would be able to offer the market and tax-payers 'the best possible incomes.' Under the President's direction, the Treasury was trying to recapture the bonus money by writing new conditions into a $30 billion instalment of government aid due to be received by the ailing insurance conglomerate.

Has Obama opened the fiscal floodgates? He inherited a trillion plus dollar deficit for fiscal 2009, which would now be higher at $ 1.7 trillion (with part of new stimulus spending) but the President has promised to bring down the deficit to half by the end of his four-year term, $ 533 billion in fiscal 2013. Are his assumptions of growth on which budget estimates are based credible? They are realistic, his economic advisers assert, relying on smart recovery in 2010 from the worst recession which had already rendered five million jobless and sapped business and consumer confidence. Uncertainties prevail about recovery because of the credit squeeze depriving businesses and consumers of much needed finance for purchases which would boost demand and revive economic activity.

Paralysis of banking…

The pre-requisite for recovery to take hold is restoring the health of the banking system which is in a state of paralysis in USA and across Europe. The $ 250 billion bail out for major banks and smaller institutions through capital injections in exchange for preferred stock undertaken in October-December 2008 and the additional bailouts for Citigroup and Bank of America have not been translated into visible credit flows. A virtual take-over of some of the leading banks began in UK while Germans and others in Europe were willing to go any length to guarantee the bad loans of banks. Obama is not in favour of nationalisation.

The Obama Administration is working on a Financial Stability Plan under which a public-private fund is to be created which could buy toxic assets of the banking system up to a trillion dollars. The US Treasury is also carrying out 'stress tests' of major banks to make an assessment of their capital needs which would cushion them from any future crises of a more serious nature. The Budget makes a provision of $ 250 billion which may be drawn upon for funding banks which need additional capital. This is in addition to the $ 350 billion at present available as balance of the $ 700 billion financial rescue plan voted by Congress in October last.

Economic recovery

Whatever Obama's ambitions for re-inventing America, he faces the sternest test in kick-starting the economy mired in the worst slump in a century and re-fixing the financial system which is responsible, accountable and transparent. He has to create or save some five millions of jobs lost in less than a year and half and generate more for the purchasing power that keeps America ticking. Responsibility and accountability are norms he has set for his own administration. And he has set up a website for citizens to keep track of government spending tax-payer dollars the way promises are held.

Economic recovery in America is essentially dependent when credits begin to flow and for this, the Administration has to expeditiously carry out the financial stability plan. But it is equally dependent on the global economy reviving and spurring demand for goods and services across borders. It is this principal concern, along with a new global resolve to roll back protectionism, that Obama would like to get out of the second G-20 Summit in London on 2 April. There is not much room for controversy over the future framework of international financial infrastructure as well as providing IMF with larger resources to help emerging economies and developing countries in the present crisis or giving greater voice and representation to these countries in IMF with a quota review brought ahead for January 2011.

The best hope is that if the banking system begins working normally, signs of recovery for US economy would begin to emerge by the end of 2009 and the recession to end in the early months of 2010. All that the Federal Reserve claims is that a depression of the type of l930s has been averted and the financial system had not been allowed to collapse altogether. Meanwhile, both IMF and the World Bank expect the current year would see contraction of the global economy by 0.6 to 1.5 per cent and trade decline would be the sharpest in 80 years. US unemployment rate, now at 8.1 per cent, would be even higher when we see the end of recession as stimulus measures work through 2010.