The rapidly unraveling U.S. economy is piling pressure on President Barack Obama to try bolder recession-fighting tactics even before all his economic advisers have found their desks.
The headlines in the first 72 hours of Obama's term included up to 5,000 job cuts at Microsoft Corp, a gloomy economic outlook from General Electric Co <GE.N> and the steepest Inauguration Day stock market drop on record.
His choice for Treasury secretary, Timothy Geithner, is still awaiting Senate confirmation after the embarrassing disclosure that he had failed to pay certain taxes.
As if that weren't enough, his economic stimulus package is facing a tougher-than-expected fight from Republicans in Congress — although Obama says he still expects to win approval by mid-February — while investors and economists clamor for an even swifter response.
"The economic crisis grows worse, and harder to resolve, with each passing week," Nobel-winning economist Paul Krugman wrote in the New York Times on Friday. "If we don't get drastic action soon, we may find ourselves stuck in the muddle for a very long time."
Passing the stimulus package appears to be Obama's first priority, but Wall Street may have other ideas. As investors pummel bank shares, calls are growing louder for setting up a "bad bank" to remove soured loans that have wiped out profits.
The new president can expect more bad economic news this week, culminating with Friday's U.S. gross domestic product report, which will no doubt underscore the obvious: the world's biggest economy is in a deep recession.
Economists polled by Reuters think GDP contracted at a 5.4 percent rate on an annualized basis in the fourth quarter, which would be the worst performance since 1982.
The Federal Reserve's policy-setting committee will spend part of Tuesday and Wednesday hashing out how best to spur growth when interest rates are already near zero.
NEW HOLE TO FILL THE OLD ONE
So what more can Obama do to fill that deepening hole?
Stimulus is the most likely next step. The problem is that while economists widely believe government spending must increase to pull the economy back from the brink, it's difficult to spend your way out of an economic crisis that was spawned by overspending.
That means the stimulus package is getting intense scrutiny on Wall Street, and the reviews aren't great.
"As the size of the overall package grows, estimates of the amount of stimulus Congress will provide appear to be shrinking," said Goldman Sachs economist Alec Phillips. "Preliminary estimates imply that of the $825 billion Congress is considering, only $250 billion will make it into the economy in the current calendar year."
Obama's economic team has tried to balance the need for immediate economic help with longer-term goals of improving infrastructure and creating jobs, not to mention eventually tackling a swelling budget deficit.
The result is a mix of tax cuts, aid to state government and infrastructure spending. Morgan Stanley economist Richard Berner said such measures "don't get to the causes of this downturn. They mainly tackle its symptoms."
Put simply, the cause is overleverage, and that applies to consumers, banks and increasingly, the federal government. One way or another, debt must be reduced, which is why government efforts to lift consumption have fallen short.
When households conclude that maybe they don't really need that 60-inch plasma television after all, electronics retailer Circuit City goes bust. The demise of that chain added more than 30,000 people to the ranks of the unemployed.
Those unemployed workers must cut their spending and often fall behind on mortgage, auto and credit card loans, adding to the pile of bad debts that have forced many of the nation's largest lenders to seek government rescue.
BAD BANK MAKES GOOD BANKS?
That is why attention is shifting to finding a way to dispose of those bad debts. Obama's team hasn't ruled out setting up a "bad bank" to soak them up, but wants to move slowly to ensure that taxpayer money is wisely spent.
The signal from Wall Street, where shares in several of the largest U.S. banks were trading at or near all-time lows, is that time is short.
Citigroup analysts said a good starting point might be tapping the $700 billion bailout fund that Congress approved last fall. Of the remaining $350 billion, perhaps $200 billion could go to buying up bad assets.
"This amount of funding would likely provide sufficient support in the short term," they wrote in a note to clients. "But if the recession takes a sufficient hold on institutions … ongoing funding may be required for more than $200 billion in assets."
In other words, Obama should keep the checkbook open.
