Published March 5, 2009

NEWS ANALYSIS

Is Obama alienating Wall Street?

And is Wall Street sabotaging the president's policies?

By LEON HADAR
IN WASHINGTON

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WALL Street has not given a welcome shout to US President Barack Obama. The Dow Jones Average has dropped almost 1,500 points since Mr Obama's inauguration a little more than a month ago, and nearly 3,000 points since his election on Nov 4.

But Mr Obama seemed to be shrugging off the bearish mood in the markets on Tuesday, urging Americans to look past the decline on Wall Street. 'The stock market is sort of like a tracking poll in politics,' he said. 'You know, it bobs up and down day to day,' he insisted. 'And if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong.'

Playing the role of the nation's chief investment analyst, the president suggested that Americans should consider buying some bargain stocks. 'Profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it . . . As they see the (stimulus package) taking root, businesses are starting to see opportunities for investment and potential hiring,' he said.

For the first time during his presidency, Mr Obama was declaring his faith in the financial markets after the Dow fell below 7,000 for the first time in 12 years on Monday. But the new Democratic president was also sending a message to many investors and analysts who have been critical of his economic agenda and its emphasis on increasing government spending and redistributing wealth, including by raising taxes on the wealthy.

Hence, if Wall Street was trying to demonstrate its lack of confidence in Mr Obama's economic policies, the president was making it clear that he was not going to change the progressive direction of his policies that are going to swell the US federal deficit and raise the spectre of inflation - the investor class's main enemy.

Mr Obama may have recalled the way another young Democratic president, Bill Clinton, was forced to shelve his very ambitious economic plans after investors and their main protector in Washington DC, then Federal Reserve chairman Alan Greenspan, warned the new president that his costly programmes would produce a bearish backlash in Wall Street that could ignite an economic slowdown.

By suggesting that Wall Street's performance was nothing more than cyclical in nature, Mr Obama was vowing not to follow in the footsteps of the last Democratic president, and that the main focus of his policies in the coming months was going to be Main Street - and not Wall Street.

In fact, Mr Obama's spokesman hinted later in the day that the president would be ready to embrace a populist anti-Wall Street approach if members of the investor class continued to try sabotaging his policies. 'For many years, as the president has said often, we had a mindset that, if it was good for Wall Street, it was good for Main Street. Now we know that's not the case,' said White House press secretary Robert Gibbs.

'The president has to look out for the broader economy and for the broader population . . . many of whom are investors, but not exclusively investors.'

But Mr Obama's response to what was seen as Wall Street's show of no-confidence in his policies carries a risk by further alienating the investors whose actions could determine whether the financial markets would come back to life any time soon.

If Mr Obama was asserting his commitment to his fiscal policy that critics in Wall Street and on Capitol Hill are labelling as 'socialist', the president and his aides have insisted that they intend to revive the financial market through an expensive programme to 'rescue' America's fraying financial institutions.

In that context, Tuesday's announcement by the Fed that it was launching a long-awaited programme to jump-start lending to consumers and small businesses should have improved the mood among investors.

And during a testimony on Capitol Hill on Tuesday, Fed chairman Ben Bernanke was suggesting that it was possible to see the light at the end of the economic tunnel. 'At this juncture, however, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained,' he said.

But in reality, there have been no indications that any of the failing financial companies that have been described as 'zombie banks' were about to come back to life any time soon. In fact, banks like Citigroup and Bank of America have remained 'undead' thanks to tens of billions in government assistance that continues to flow into their coffers, with no end in sight.

In a way, the financial condition in the US recall those in early-1990s Japan when its zombie banks were propped up by the government.

Washington, like Tokyo in the 1990s, is worried over the 'systemic risk' posed by the weakness of these gigantic financial institutions and that letting them collapse would lead to major defaults throughout the American and global economy.

One could argue that while Wall Street may dislike the Obama administration's fiscal policies, the same Wall Street also recognises that its long-term survival depends on Washington's financial generosity, and that its ability to disrupt Mr Obama's long-term economic plans is quite limited.