For the United States, that means sometime between 2013 and 2016, depending on which measure of debt one chooses. Households have already whittled their debts down, often by defaulting; banks have rebuilt their capital; and home prices, which hit bottom in January, are rising steadily.
So, how will historians judge the economic legacy of Obama’s first term? There will be black marks, such as his failure to produce a lasting solution to America’s deficits, in particular the rising cost of Medicare. Indeed, the biggest near-term threat to economic recovery remains tightening government budgets, in particular the“fiscal cliff,” a withering combination of tax increases and spending cuts that could automatically take effect in January. Yet, historians will probably also see many things that laid the groundwork for stronger growth in later years. Here are the most notable:
Reappointing Ben Bernanke
Presidents often come to regret their Fed chairman appointments; Volcker helped doom Carter’s reelection chances, and George H.W. Bush suspected Alan Greenspan of doing the same for his.
Obama announced the 2009 reappointment of Bernanke, a Republican, largely because of Bernanke’s aggressive response to the financial crisis. While the Fed chief has since tried to boost growth with repeated rounds of quantitative easing — the purchase of bonds with newly printed money — some Obama supporters have groused that he isn’t trying hard enough.
Last month, though, the Fed broke new ground by committing to open-ended bond buying until unemployment has fallen substantially, even if inflation tops the Fed’s 2 percent target. Since monetary policy works with a lag, this is probably too late to help Obama’s reelection chances much. But it will be a boon to whomever occupies the White House starting next year. Moreover, by waiting until he had built a consensus inside the Fed, Bernanke is more likely to see his policy survive, even if a future president replaces him, as Romney promises to do.
Making the banks safe
Under Obama, banks have been forced to hold hundreds of billions of dollars in additional capital to absorb potential losses and to exit risky lines of business, such as trading for their own accounts. If they need a bailout, they must suffer a draconian government-run restructuring that wipes out their shareholders. Debit cards, credit cards and derivatives are all less lucrative businesses. U.S. banks are the best capitalized they’ve been in at least 20 years.
Of course, spreading smaller profits over more equity capital is a recipe for lousy shareholder returns. Ed Najarian of the brokerage firm ISI Group estimates that the market now values big banks at 20 percent less than their book value while valuing regional banks at 80 percent more — a source of deep frustration to big banks but an effective disincentive to any bank to get too big to fail.
Much of the new regulation is overkill, and Obama has probably hurt growth and himself by raising the cost of credit. But in the process, he has done future presidents a favor. There will be new financial crises, but banks aren’t likely to be the cause for a long time.