Huge economic task may take longer than one obama term

As Obama admitted on Tuesday in his victory speech in Chicago, the challenge of putting America back on its feet again will be enormous and will take time, probably even longer than his fouryear term.

Imagine America is a corporation. What CEO Obama will need to do is to write off the bad debt in the company's balance sheet. The process will be painful. It will take time.

When Japan faced the financial crisis in the 1990s, it took 10 years to recover. In the case of Thailand, the recovery took six years.

One might recall that when Thaksin Shinawatra took office in 2001, the first thing he did was to call a meeting of top bankers. He wanted to know when they were going to lend money to corporate borrowers or consumers so that the economy could get going again.

The Thai crisis took off in 1997, and five years later the bankers were still reluctant to lend for fear that their money would turn into nonperforming loans again due to the weak economic recovery. It was not until 2002 that the Thai economy began to rebound, thanks largely to the sound global environment, which boosted Thai exports.

The US is now facing a recession and a deflationary - not inflationary - trend. "It's the first time since the Great Depression that the two biggest components of household net worth - stocks and real estate - are falling simultaneously," wrote Liz Ann Sonders, the chief investment strategist at Charles Schwab, in her report, "Arc of a Diver: Inflation Succumbs to Inflation".

"Deflation in these assets, as well as others, can become selfperpetuating as consumers hold off on consumption in the hopes of better prices in the future, keeping downward pressure on demand. The cycle can become vicious, as it was in the 1930s in the United States and in the 1990s in Japan. On the other hand, mild deflation is less damaging to the economy and the stock market. We believe the aggressive stance of the Fed today should keep us in the milddeflation camp," she said.

But the US economy won't bottom out until the housing market is stabilised.

"Using mortgages as an example, when you are subtracting a negative number (realestate price declines) from a positive number (30year fixed mortgage rates), you get an elevated 'real' reading. Simply put: a homebuyer will currently pay a 6.5percent 30year fixed rate to buy an asset that's depreciating at a doubledigit rate, putting his actual 'cost' of borrowing significantly higher. It begs the questions: who wants to borrow money to buy a rapidly depreciating asset, and who wants to lend money to someone to buy a rapidly depreciating asset?" added Sonders.

Many believe that the housing market recovery will start to pick up the pace at the end of 2009 or early 2010, but it will take several years to mend the damage to the financial system.

According to Yahoo! Finance, Obama will be facing the following reality check:

l The deficit will be more than US$1 trillion (Bt35 trillion) a year for several years

l The country needs a massive new fiscal stimulus

l The housing market will continue to decline through at least 2010

l Interest rates and taxes will eventually have to rise (after the economy stabilises)

l Weak corporations have to be allowed to fail

l Millions of homeowners will lose their houses

l Unemployment will probably rise to 10 per cent

l The government simply cannot "bail the country out" - not because it lacks the will, but because it lacks the power.

"In short, Obama needs to acknowledge reality, erring on the side of overstating the problems and challenges, and he needs to prepare the country for several tough years," Yahoo! Finance says. "Because if he doesn't, within six months of his taking office, the country will have forgotten all about the prior administration and will instead be blaming everything on him."