Pressure Is on for Obama, but This Rescue Relies on All of Us

By Steven Pearlstein
Wednesday, November 12, 2008

Who would have thunk it?

Goldman Sachs lays off nearly 3,300 and could post its first quarterly loss since becoming a publicly owned company.

Starbucks comes within a whisker of a money-losing quarter.

General Motors begs Washington for a payday loan, warning it may collapse without it.

KKR, the buccaneer of private equity, is unable to sell shares to public investors.

The federal budget deficit hurtles toward $1 trillion, with serious economists arguing it should go even higher.

Oil-rich Russia scrambles to defend its currency, oil-rich Dubai steps in to rescue its banks and China -- China! -- worries enough about a slowdown that it promises a stimulus package equal to 15 percent of its annual economic output.

Things are so bad that even the Yellowstone Club, Montana's super-exclusive private ski and golf resort, where the price of admission starts at $5 million, has filed for bankruptcy.

With the events of the past few days, it's become clear that even the strongest players, the biggest companies and the richest investors are facing serious financial challenges.

The speed at which things have come unraveled is breathtaking. Only a few months ago inflation was the big worry and some analysts were suggesting that the U.S. economy might avoid a recession. Now, the fear is of deflation and a global depression.

And just when we think we have rescued a company or stabilized a market, an AIG or a Fannie Mae suddenly requires another dose of money and attention.

The election of any new president leads inexorably to heightened expectations of what he can accomplish, but that is particularly true at a time like this, when Americans are desperate for someone who can stanch job losses, put a floor under house prices, prevent foreclosures and restore value to diminished 401(k) retirement accounts. There is extraordinary pressure on Barack Obama -- from the public, the news media, Congress and even from other world leaders -- to move quickly and decisively "fix" the U.S. economy.

But even for an activist like Obama, there are limits on what he and government can do.

The reason we are in this mess is that Americans, collectively, lived beyond their means for many years, consuming more than they produced and investing more than they saved, thanks to trading partners and foreign investors who were only too happy to lend them lots of money at cheap rates. Now that the credit bubble has burst and the party is over, Americans will have no choice but to go through a painful adjustment to get things back into balance.

That means that American households will have to spend less and save more, as they are beginning to do. It means that voters will have to decide whether they want to pay higher taxes or reduce the level of benefits or services they demand from government. It means that housing prices will have to fall to levels that make homes affordable to the people who live in them. And it means that companies will have to shrink their operations to reflect that new, lower level of consumer spending.

Most economists agree that government now has an urgent role to play in managing that adjustment, preventing markets from spinning out of control and turning what is a necessary recession into a prolonged depression. And most Americans want government to take steps to see that the pain of that adjustment is shared somewhat fairly and equitably, and ensure that the poor and vulnerable are protected.

But as Obama is quickly discovering, there is little consensus on what a fair and equitable adjustment looks like.

If government money is used to bail out banks and Wall Street investment firms, on the theory that their failure would cause too much collateral damage to the rest of the economy, it's not hard to make the same case for the strapped Detroit automakers and the millions of industry workers and pensioners who rely on their continued operation.

Moreover, if the government provides money to automakers, should it require that the companies forswear any further layoffs, as some have suggested? Or should the government require that shareholders, creditors, pensioners and active workers make whatever sacrifices are necessary to ensure that the money is repaid and these companies emerge as profitable, competitive and environmentally born-again?

On the other hand, why should the government come to the rescue of autoworkers while doing nothing to protect the jobs of the 9,500 delivery workers whose layoffs were announced this week by Germany's DHL, or the 1,300 employees who are about to be laid off by Nortel, the telecom equipment maker, or the thousands more employees who will lose their jobs at electronics retailer Circuit City, most of whom could only dream of pay and benefit packages like those to which unionized autoworkers still feel entitled?

Stemming the tide of home foreclosures is also a top priority on most agendas, but that hasn't turned out to be as simple as it sounds either. Most people agree that mortgages should be renegotiated and monthly payments reduced to levels households can afford. The disagreement starts over how the financial haircut should be distributed among the original lender and investor, the government and the homeowner.

There is little in Obama's campaign platform, and his oft-stated promise to "restore the middle class," to suggest how he will answer these questions or where he will draw the lines. But it won't be long before he is forced to acknowledge that even the federal government, with its unmatched capacity to borrow and spend huge sums, cannot rescue every important industry, save or replace every job, prevent every foreclosure and restore every budget cut. The sooner he levels with us about those limits and the extent of shared sacrifice that will be necessary, the sooner the new president will be able to establish confidence in his leadership and restore faith in our economic future.

Steven Pearlstein will host a Web discussion today at 11 a.m. at He can be reached at

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