Who’s Watching the Money?

Barack Obama thought he could have a fairly normal transition. Oh, he knew how serious the financial crisis was ("something that we have not seen since the Great Depression," he told "60 Minutes"). But after pledging to tackle the economy "head-on" at a Nov. 7 news conference in Chicago—with 16 of the nation's economic elites standing behind him like the board of America Inc.—Obama apparently felt he'd said enough. There is "only one government and one president at a time," he said, adding that he would apply "deliberate haste" to choosing a Treasury secretary and other cabinet members. Then the president-elect ensconced himself in his transition bunker in Chicago, attending to important matters like discussing the secretary-of-state slot with Hillary Clinton.

Yet with the economic news worsening every day, Obama found he couldn't ignore the growing power vacuum back east. Drained of energy and ideas following its $700 billion bailout program in October, the Bush administration seems to be giving new meaning to the concept of "lame duck." President Bush served as a genial host—but nothing more—at an emergency meeting of the G20 nations that produced no plan. Treasury Secretary Hank Paulson, apparently feeling he too had done enough, blocked a Big Three auto rescue and abruptly abandoned the "distressed asset" buy-up plan he sold to Congress in October as a cure-all. Since those assets—the toxic subprime mortgages that started the collapse in the first place—are still sitting like a dead weight on many firms' balance sheets, frightened investors have begun to wonder all over again which firms are going under and which will survive. Making matters worse, Paulson delivered a rambling history of the crisis at the Reagan Library in California that sounded like a farewell—two months before he actually leaves office. Federal Reserve chairman Ben Bernanke, meanwhile, found himself almost out of tools, having already pushed interest rates to near zero.

In ordinary times, a leisurely transition and the fact that Congress is full of lame ducks for nine weeks don't matter much. In ordinary times, the lack of civic-minded business leaders with credibility and a desire to exert forceful leadership doesn't matter much either. But as the president-elect has acknowledged, these are not ordinary times. A sense of drift has gripped the politico-economic nexus of New York and Washington, and the markets have begun to fear that what was already a major recession could turn worse. Panic sent the yield on the only known safe investment haven, U.S. Treasury bonds, to record lows of less than 1 percent in some cases. What that means is that people don't even expect to earn profits anymore; they just don't want their money to disappear entirely. Investors have been unwilling to commit capital to a wide range of stock sectors (financial, auto, insurance, housing) because they don't know the amount or scope of federal aid.

So pervasive has the panic become that some critics were starting to point fingers back at Chicago. To be sure, Obama doesn't have the power to do much of anything to right the economy during this transition period, but what he can do is reassure the markets by quickly making clear the course he plans to take, with a detailed map of his economic rescue plan—something the Obama team has been loath to do so far. Even some Obama advisers admitted to a sense of puzzlement over the president-elect's seeming slowness in fleshing out his stimulus and auto-bailout proposals.

As the markets continued to tank, Obama answered his critics in part on Nov. 21, settling on Timothy Geithner as his likely new Treasury secretary. Geithner, the 47-year-old president of the Federal Reserve Bank of New York, is a respected market interventionist who studied at the knee of former Treasury secretary Robert Rubin as an under secretary during the Clinton years. Geithner—who was born two weeks after Obama—has a quick laugh, a sense of irony and a lot of energy, bouncing in and out of rooms at the sedate New York Federal Reserve building. For the past several years Geithner has functioned as Wall Street's fire chief, playing a crucial behind-the-scenes role in the Paulson-Bernanke bailouts (a topic that may cause him some discomfort at his confirmation hearings). Geithner's appointment certainly cheered the markets: the Dow turned on a dime and shot up nearly 6.5 percent on the news.

The Geithner appointment, and Obama's announcement Saturday that he is developing a two-year stimulus plan including new job-creating investments in infrastructure and alternative energy, are signs that he is beginning to grasp the economic rudder. Even so, many say more will be expected from Obama before he takes office. Rep. Barney Frank, chairman of the House Committee on Financial Services, told NEWSWEEK HE has urged the president-elect to make a statement right away asking that Paulson's Troubled Asset Relief Program—or TARP—be redirected for wide-scale mortgage relief. "It has become important for him to speak out about that," Frank told NEWSWEEK. "My sense is that Paulson is steering clear of any further use of the TARP because he doesn't want to pre-empt the president-elect. But the danger is Obama will get blamed for Paulson's decision" to hold back the money. New Jersey Gov. Jon Corzine, another Obama adviser, urged the president-elect to push for a stimulus "north of $600 billion." "You have to pick a program that is going to have overwhelming force," Corzine told NEWSWEEK. To reverse market psychology, Obama should "get something together that could be proposed the moment he's sworn in."