THE BLOG
07/12/2013 02:49 pm ET | Updated Sep 11, 2013

Obama to Take Over Baton From Fed?

Risky fiscal fall

As the U.S. Fed is not planning to boost the asset markets for much longer, growth will have to come from the private sector albeit with help from the government. However, it remains to be seen if politicians in the United States will be able to contribute to a healthy base for economic growth later this year.

As growth has picked up, concerns over the fiscal health of the United States have receded into the background. The fiscal problems may be out of the limelight, but they have not gone away. A relatively quiet summer will be followed by a hectic fall. Democrats and Republicans will cross fiscal swords. On October 1st, the U.S. federal budget runs out, the sequester for the fiscal year 2014 takes effect, and the U.S. will hit the debt ceiling. In 2014 too, the U.S. federal government may well need a so-called "continuing resolution" just to keep going.

Political hot potatoes

The fiscal debate is not the only "interesting" item on the agenda in the last part of the year. Political issues that could make waves in Q4 are the Keystone XL pipeline from Canada to the U.S., immigration law reform, the ongoing story of Obamacare, and the nomination of the next Fed chairperson.

The above issues give the president some bargaining chips as he attempts to strike a fiscal deal. Maybe he can deliver a grand bargain via package deals. But equally, political hot potatoes could sour the mood sour so much that compromise is out of the question. The debate will then spiral out of control and create an (even more) poisonous atmosphere in Washington.

Scandals threat to Obama?

Lately, Obama has been under attack from various sides. Several scandals threaten to undermine his reputation. AP and Fox journalists have been spied upon and the Internal Revenue Service has deliberately targeted organizations linked to the Tea Party for extra scrutiny. Meanwhile, the effects of the affair surrounding the deadly assault on the U.S. consulate in Benghazi (Libya) are lingering on. The latest uproar of course concerns the National Security Agency's snooping activities. This has led to a global outcry and has undermined Obama's reputation and political power abroad.

Obama's weakened hand reduces the chance that he can move the fiscal agenda forward. Meanwhile, Mr. Obama seems increasingly preoccupied with his legacy. U.S. presidents want to leave their mark on world affairs as the end of their last term approaches. Several have tried to solve the thorny Israeli-Palestinian problem (Clinton made a brave but ultimately naive and fruitless attempt). Obama appears to focus on, among others, reducing the world's nuclear stockpile -- witness his recent speech in Berlin -- and closing Guantánamo Bay.

Still some cards up his sleeves?

The U.S. president still has some political capital at his disposal. His approval rating (50 percent) may not be spectacular but it exceeds the dismal endorsement of Congress (15 percent). Many voters still give him the benefit of the doubt; just 26 percent of Americans are satisfied with the direction the U.S. is taking, but Obama's ratings indicate many do not believe he is to blame for their disappointment. In any case, the presidential "approval premium" has not been this high since Reagan. Perhaps this will give Mr. Obama the courage to get down to business in Q4 and take decisive steps towards restoring the fiscal health of America.

Obama and Congress on their own

We see various dangerous obstacles on the road. Rising interest rates as the Fed takes a back seat -- not to mention the approaching deadlines -- mean that the public finances will be a "hot item" again in September/October. Add to this immigration reform, Bernanke's succession, and the Keystone project. There is not a lot of time left to conclude a grand bargain; the midterms are too close for comfort.

Therefore it would not surprise if the U.S. stumbles from cut-off date to cut-off date. Democrats and Republicans will not suddenly be prepared to meet each other halfway but that does not mean that the government will shut down. But the Fed throttling back and Washington being sclerotic, could turn markets increasingly jittery. One thing is certain. Once Bernanke (and his printing press) retreat into the shadows, the politicians will definitely have to come up with the goods and take more decisive action than they have hitherto done.