Presidential transition adds uncertainty to markets

WASHINGTON (AP) — Why aren’t the government bailouts working?

The presidential transition may be adding to the uncertainty roiling the financial markets. In fact, knowing the names on President-elect Barack Obama’s economic team may prove more helpful in calming those stormy markets in the short term than bailout packages that so far haven’t had much payoff.

After two days of steep declines, stocks rallied strongly on Friday — with the Dow Jones industrials surging nearly 500 points — on news that Obama planned to name New York Federal Reserve chief Timothy Geithner to be treasury secretary.

But that came at the end of another very tough week for the economy.

While Obama likes to say there can be but one president at a time, Americans need to know one is fully on the job. While many different things have contributed to the economic panic spreading worldwide, it doesn’t help that the crisis is being played out in the muddled political wilderness of a lame-duck Congress, a departing president and an incoming administration that hasn’t yet been formed.

William Galston, who was a White House domestic policy assistant in President Bill Clinton’s first term, said Obama is likely to “name the economic team together as a package, so people can see how the pieces fit together and how people are likely to work together.”

That could come early next week. It could help bring some clarity to the economic strategy picture, and alleviate what markets hate most: uncertainty.

Geithner has been a top player in the current economic crisis — helping Treasury Secretary Henry Paulson and his team manage the Wall Street bailout.

“Having a new administration come in with new faces and new ideas and with a Congress which is firmly behind it could restore confidence as quickly as it has evaporated,” said Mark Zandi, chief economist at Moody’s Economy.com

“The Bush administration is winding things down and the Obama administration is trying to gear things up. And in the middle of all this, we’ve got this complete collapse of confidence. And there is a vacuum,” said Zandi.

Even with the late-day rally, stock market gains of the past decade have been essentially erased. Credit markets that had thawed briefly have frozen again amid widespread fears of a deep and long recession.

Congress, the administration and the Federal Reserve have hurled well over a trillion dollars at the problem. But while Paulson told Congress this week the U.S. had “turned the corner” in averting a financial collapse, there is little evidence that the economy’s downward spiral has been broken.

Obama told CBS’ “60 Minutes” in an interview aired last Sunday that, while the government’s big financial bailout program may not have worked as hoped, “things could be worse.” But, unless Geithner’s selection can work wonders, there’s little evidence things will be getting much better soon.

Among the mistakes and other reasons cited by economists and financial analysts for why bold steps haven’t had much apparent impact so far:

— Initial market satisfaction with the $700 billion financial bailout passed in October soured after Paulson abandoned his original plan to buy troubled assets from financial institutions and moved to use most of the money instead to invest directly in banks and firms that issue auto, student and credit-card loans. His statement this week that he would leave the final $350 billion of the bailout money for the Obama administration in January raised further uncertainties about the Bush administration’s commitment.

— The steps taken so far have provided little in the way of direct aid to homeowners facing foreclosure or who have lost their homes.

— Even though the Fed on Oct. 29 slashed its key interest rate to 1 percent — a level seen only once before in the past half-century — and is believed to be pondering a further cut next month, there is always a lag time between rate cuts and economic improvements.

— The collapse of a a $25 billion congressional effort to rescue automakers further rattled markets and raised the specter of Big Three bankruptcies that could ripple through the economy and claim millions of jobs.

— Many economists fault the administration for allowing Wall Street bank Lehman Brothers to fail, after helping to rescue Bear Stearns and taking over mortgage giants Fannie Mae and Freddie Mac. The failure spooked investors.

— Rising unemployment and a sharp pullback in consumer spending have overwhelmed multibillion-dollar government efforts. Consumer spending usually accounts for two-thirds of the overall economy, and when it starts to topple, it’s hard to keep the dominoes from falling.

— Tumbling financial stocks have been further driven down by a Wall Street strategy known as short-selling in which investors wager that stocks will fall. Also, investors who borrowed money to buy stocks are being hit with “margin calls” forcing them to sell involuntarily.

“The financial system is still precarious and the real economy is going to get worse before it gets better. That’s enough explanation for the markets being extremely nervous,” said economist Alice Rivlin, budget director in the Clinton White House and vice chair of the Federal Reserve from 1996 to 1999.

While Obama aides have stayed in close touch with congressional leaders, his camp doesn’t seem to have taken a direct role in either the auto-rescue talks or details of a new stimulus package.

That could change with the announcement of his economic team.

“I have friends at the New York Fed who are lyrical about Tim Geithner,” said Lyle Gramley, a former Fed governor and now senior economic adviser at the Stanford Group. “He’s very, very highly regarded.”

But Geithner also has his detractors, based on his role in the rescue efforts by the Fed and Treasury, some of the actions quite controversial.

“I would expect his confirmation hearings to be animated, with some strong opposition asking questions about his involvement in the AIG, Lehman, Goldman, Morgan and Bear decisions by the New York Fed,” said Joshua Rosner, managing director at research firm Graham Fisher & Co. in New York.