Weekly outlook

Obama steps into Roosevelt’s shoes

By Tom Stevenson, 21 January 2009

President Obama’s inauguration inevitably invites comparison with the first Roosevelt term – but there are differences as well as similarities It is perhaps unavoidable that President Obama’s maiden speech this week should invite comparison with Franklin D Roosevelt’s (FDR) famous inaugural address in 1933 when he told America and the world that “the only thing we have to fear is fear itself”. Both men were great orators who entered the White House at a time of national, and indeed, global crisis. They both carried the burden of a country looking to them for a solution to profound economic and social problems.

"Fuelled by the 'audacity of hope' Obama aims to restructure the American economy" Tom Stevenson

Both presidents took the oath of office after periods in which massive expansions of consumer credit had led to financial crises, stock market crashes and bank failures.

And both presidents understood the huge scale of the task that awaited them. Roosevelt had said that “only a foolish optimist can deny the dark realities of the moment”. Obama warned this week of "gathering clouds and raging storms".

The similarities should not be overplayed, however. There are key differences too.

By the time FDR became president in March 1933 much damage had already been done by his anti-interventionist predecessor Herbert Hoover. Obama, by contrast, has the luxury of at least building on a sound policy response to today’s crisis.

Hoover believed that Washington had no role to play in kick-starting the economy. In fact he cut public spending in order to balance the Federal budget in the face of falling tax receipts. He said at a press conference in 1932 that “Government cannot continue to live in a depression upon the scale that was possible in times of great prosperity.”

That aggressive tax policy was compounded by a similarly hard-line monetary policy which saw the Fed actually raise interest rates in order to prevent an outflow of gold to which the value of the dollar was fixed. Government policy, rather than easing the plight of ordinary Americans, actually made it worse between 1929 and 1932.

Revolutionary thinking

What FDR did to turn the economy around looks obvious now but it was radical at the time. Most famously he started the New Deal program of government spending, launching a raft of new government agencies and funding massive new infrastructure works in a frenetic first 100 days in office.

But his other actions were equally important. He immediately announced a “Bank Holiday”, from which only the healthiest banks were permitted to re-open. And he took the dollar off the gold standard, allowing interest rates and the dollar to fall.

This all looks familiar from a modern perspective when, hopefully, we have learned some important lessons from both the Great Depression and Japan’s lost decade, another example of poor policy exacerbating an already bad situation.

Under “Depression buff” Ben Bernanke, the Fed has already moved quickly to ease monetary policy, embracing the nuclear option of printing money to keep the economy moving and fend off deflation.

The Audacity of Hope

President Obama is putting together his own New Deal, a package of public works that could cost up to $1trn. Fuelled by the “audacity of hope” with which he wooed the American voters in November, his new New Deal is not content to jolt the US economy back into life but to completely restructure it.

He wants to promote alternative energy, equip thousands of schools, computerise all medical records and build out broadband in an ambitious plan to not just replace America’s creaking hundred year old bridges and roads but to set the country up for leadership in the new technologies of the future.

The risks are as great as the opportunities and this has big implications for all of us, but especially for investors. First, President Obama must balance the need for an immediate stimulus with effective allocation of resources in the long-term. Second, he must ensure that the potentially massive cost of his programme does not destabilise the US economy for years to come.

When in doubt, President Obama is likely to err on the side of doing too much rather than too little. Policy mistakes will inevitably be made and the risks of a flight from the dollar or rising prices further down the track are every bit as real as those of deepening slump and deflation.

But if ever there were a time for hope, the week of the inauguration of the first ever black US President is surely it. If Obama’s bold policy moves work, recovery will at some point kick in against a backdrop of low inflation and loose monetary policy. That is the sweet spot for equities and it will be a great time to be invested in stocks.