ON BARACK WATCH

Hope: a nice feeling that is without substance. Change: a constant in our lives that only accelerates as time passes. Trust: something that must be built and earned which, while still President-Elect, Barack Obama cannot expect from his fellow Americans.

And what of those fellow Americans? We had better be vigilant now and into the future as well since none of us know where Obama will go and, as of yet, there are no indications that he knows where he will go. The nation must stay on Barack watch since hope, change and "yes we can" amount to nothing more then hot air.

So what can we all watch for going forward? The simple answer is actions, which always speak louder than words. We know the President-Elect is an inspirational speaker. That's nice, but of no value. We have discovered that listening to his words basically gets us nowhere since, although exciting, are bereft of specifics or are sometimes even contradictory to one another. Therefore, it will be actions that will prove to be the road signs to the future. All of us must pay close attention to those signs.

Be on the lookout for:

1. Appointment Announcements: so far, these have been very slow in coming. Who will Obama choose to populate his key staff positions, beyond Rham Emanuel which is the only one made public to date, as well as his cabinet posts? Will it be people from the far left? If so, that will be telling. Will it be many from the old Clinton gang? How about bipartisan choices: who and how many? Window dressing or a sincere effort to team build for the good of the country? Political pay back for campaign donations and endorsements or an effort to put together the best and the brightest? Watch all of his appointment carefully and evaluate each on it's own merits. Look for the emerging patterns and make judgments based upon the trend lines. Remember, do not listen to the high rhetoric, but keep a tight eye on what transpires.

2. Executive Orders: look for these to come fast and furious starting on day one. These are Presidential fiats that can be issued and put in force without the approval of the Congress. Obama will issue plenty of these, on a variety of matters, and do so with intent and purpose. Some of his Executive Orders will amount to political payback to supporters. Some will revoke Executive Orders put into place by George Bush. Others will be early indicators of the intent and direction of the new President. All of them will be significant and worthy of close scrutiny and consideration. On Barack watch, it will be important to make note of each and every one of these.

3. Commander In Chief: another arena where much can be done by Obama that will not require approval from other quarters. This could prove to be the most interesting activity to follow. On the one hand, we have the Obama promises to get out of Iraq and to make additional troop deployments in Afghanistan. On the other hand, withdrawal from Iraq would take a year and one half at the minimum and possibly run the risk of destabilizing what is otherwise pretty much a done deal. Further, many experts believe that the solution in Afghanistan does not lie with an increase in troop deployment. Even military leaders acknowledge that the answer there will not be a military answer. Being attentive to the early on activities of CIC Obama will tell us a lot about the direction to be taken in the war on terrorism and, by definition, the future of our national security.

4. Passing A Test: virtually everyone, from running mate Joe Biden, to allied leaders around the world believe that Obama will face a serious, in not severe, foreign policy test sometime within his first year in office. How he reacts and what actions he takes will be telling, not to mention set the tone for his entire presidency. This prospective test will be the measure of the man. More than any other single action, this one will tell us most all of what we need to know about the immediate future of the United States. Our enemies, and there are now and there will remain many, cannot wait for the departure of their nemesis Bush. They have been examining their options for some time now, but most certainly their planning has become highly energized since November 4th. As already emphasized, when this foreign policy test comes, it is the action taken, not the words spoken, that will tell us what we need to know.

5. Facing The Economic Challenge: this one is of primary importance to most Americans. It is here were government can seriously over reach and in the process do much more damage than it can do good. Our own history is replete with examples of how government has exacerbated trouble in our economy so as to make it a disaster. There is a proclivity on the part of Obama to have government be the solution here when in fact, doing so can insure that government becomes the catalyst for even greater problems. Our Barack watch must, by necessity, be extra vigilant relative to the economy. We are nowhere near the former Great Depression and, although we may be in recession, what government does can help to make it shorter or longer. The article that follows speaks to some to the issues that government can address to put our economy back on track. To ignore the advice therein would be a mistake of major proportions, as history has clearly illustrated.

6. The Executive Branch vs. The Legislative Branch: how Obama will fare in this match up will be telling indeed. He has a boat load of radicals from within his own party in charge of the Congress and they will be much more responsive to the far left fringe than he can afford to be as President. Which branch wins the ensuing tug of war will dictate much of what happens in this nation over the next four years. If Obama is assertive in pursuing his agenda and if that agenda tends more towards the center as opposed to the far left, his first term in office will be a lot smoother on the domestic front. If, on the other hand, he gets pushed around by the radicals running both houses or if he becomes radical himself, his will be a failed first term and a second term will be in serious jeopardy. Watch this match up closely as it will be a major future indicator of the success or failure of the Obama administration.

The bottom line is this: do not put your trust in hope, change and "yes we can", as there is no there, there. Do not be influenced by the melodic rhetoric of the inspirior in chief. Instead, watch the actions as the indicators of the path forward. Evaluate those signs carefully and in the clear light of day.

They will tell us if our new President is to be trusted.


Dear Mr. President
By JIM MCTAGUE
Our open letter to Barack Obama outlines eight steps he should take to restore order to financial markets and bolster the economy.

ROLL UP YOUR SLEEVES, MR. PRESIDENT-ELECT. America's financial crisis has become so dire that you must act now, not after the swearing-in ceremony on Jan. 20. Don't worry; there still will be plenty of restoration work remaining after the inaugural bash. But starting this week, you have to make sure that House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid and the lame-duck Congress get it right, lest they roil the already panicky markets and make things worse.

In order of urgency, Obama must support fresh stimulus, aid for Detroit, foreclosure relief, a delay on tax hikes, free trade, new financial regulation, fuel-efficient cars and fair rules for union votes.

On the following pages, you will find the recommendations of Barron's editors -- eight steps, starting with the most urgent. Some of the recommendations are sweeping, while others are tightly focused. All eight, however, are necessary to bolster the confidence of consumers and businesses, get the economy back on its feet and restore order to financial markets.

No offense, but your relationship with markets could use some improvement. Since Sept. 24, when you opened up a nine-point lead in the race, the Dow has fallen 19%. Don't let it fall further. You must show the markets that you understand the problems and are taking action. Here's how.

1. Back a Bold Stimulus Package
Last week, the chances for an immediate stimulus package seemed to fade on Capitol Hill. You must push hard for action, because the fourth quarter is shaping up as a ghastly one for the economy.

Support a $100 billion stimulus now, and be ready to advocate another, similar-size package soon after you take office. Pay the money to people right away -- as was done in the $168 billion stimulus package earlier this year. The mere knowledge that it's coming could prompt consumers to step up their spending for the holiday season.

True, the last stimulus effort didn't set off a gale of economic activity. Many folks used their $600 checks to pay down debt or bolster their savings accounts. But moves like that increase confidence and strengthen the financial system. Any boost to spending will help.

Keep a close eye on the stressed budgets of cities and states. The stimulus package for early '09 should include as much as $50 billion in direct grants to cities and states so that they don't have to cancel projects, lay off workers, and raise taxes. It does no good for the federal government to hand a taxpayer some extra money if state tax collectors are going to immediately take it away. Also, consider allotting $50 billion for infrastructure projects.

2. Support Aid for Ford, GM
Offer an aid package to GM and Ford -- $25 billion for each in the form of special preferred stock that would pay the government a dividend.

Though the idea of a bailout is languishing on Capitol Hill, and it can be argued that bankruptcy proceedings would help them restructure, we feel that a bailout is essential. These two companies are vital parts of America's industrial base. You cannot let one or both of them collapse, particularly in today's sagging economy.

Chrysler, on the other hand, lacks the brand and world stature to compete in the future. You should encourage it to merge with GM or Ford, or perhaps with a foreign maker. Alternatively, Chrysler could sell its valuable business lines -- the Jeep and minivan units -- and toss the rest on the scrap heap.

In shaping deals, be sure to wring significant concessions from management, labor and shareholders, including Cerberus, the private-equity firm that controls Chrysler and General Motors Acceptance Corp. The managers of the car companies who have brought them to this precipice should be forced to take big pay cuts and potential severance, or perhaps shown the door.

At the same time, existing and retired workers and their unions must accept plant closings and reductions in benefits and pay. Deals like this should be far more palatable for the workers than bankruptcy proceedings, where workers' pensions could be reduced significantly and retirees' health benefits eliminated. Of course, if you deliver on your campaign promise for universal health care, then this concession by retirees will be moot. But you may not be able to pursue your health-care agenda for some time.

3. Help Homeowners
The avalanche of foreclosures must be stemmed, pure and simple. The central problem for the economy is the housing crisis, and the central problem for housing is foreclosures.

Most of the solutions proposed so far are half-measures, such as tinkering with interest rates or extending loan maturities. Barron's believes the government should kick in $100 billion to reduce the principal on mortgages in serious arrears as of Dec. 1, drawing on the $700 billion financial bailout approved by Congress. Participating banks, mortgage servicers and holders of mortgage securities should contribute another $50 billion.

The program would reduce a borrower's mortgage to the level of the home's current value, which might amount to a cut of 20% to 30%. In return, the government would be entitled to an agreed-upon portion of any price appreciation realized when the home is sold. In other words, neither the homeowner nor the mortgage lender would get a free ride. Yet both would be better off than with foreclosure -- and so would the economy.

Homeowners who have managed to keep up with their mortgage payments could well feel cheated by this plan. Our advice: Get over it. The state of the economy requires bold action, and everyone will be better off once the foreclosure problem is curbed.

The Federal Deposit Insurance Corp. last week put forth a creative plan that also merits consideration. Among other things, it would offer guarantees to investors in securities backed by mortgage securities. But our proposal is simpler and more direct, and its cost to taxpayer may not be much more than the FDIC's. While the banking agency puts the cost of its plan at $24.4 billion, the Bush administration's Office of Management and Budget figures it could reach as high as $72 billion.

4. Delay Tax Increases
Make it clear that you will delay any tax increases for at least a year. You can raise them on high-income earners, as you have planned, when the economy is growing again and creating wealth and jobs. But you don't want to take spending money away from anybody when we are in a downward, recessionary spiral. That will only make things worse. Taxes were hiked during the Great Depression, prolonging the misery. By all means, give the middle class the tax cut you promised. But, as much as it pains us to say it, don't try to pay for it until later.

There are serious problems with raising taxes on the wealthy. These folks tend to plow a lot of their money into family businesses and publicly traded stocks, helping create jobs. That activity can slow when Uncle Sam increases his take from the rich, studies have found. And that's to say nothing of fewer shopping trips to Neiman Marcus.

If, in the opening months of your administration, you feel compelled to raise taxes, raise them on gasoline. That would give us all more incentive to buy fuel-efficient cars and trucks.

Eventually, of course, the country will have to pay its debts. It is to be hoped that, when you do finally raise taxes, you will employ a simpler, more economically rational, and more equitable system than the one now in place.

5. Don't Impede Free Trade
Rightly or wrongly, the markets worry that you don't appreciate the lesson of Smoot-Hawley Tariff Act, signed into law in June 1930 by President Herbert Hoover over the objection of leading economists.

Smoot-Hawley's high tariffs exacerbated the Depression because it provoked retaliation by foreign governments. According to the Department of State, U.S. imports from Europe tumbled from a high of $1.3 billion in 1929 to $390 million in 1932 while U.S. exports to Europe fell from $2.3 billion to $784 million during the same period. These "beggar-thy-neighbor" polices reduced world trade by 66%. Let's not go through that again.

While on the campaign trail, you called for new negotiations on NAFTA, the North American Free Trade Agreement that was signed into law in 1993 by President Bill Clinton -- ostensibly to make it more equitable. Yet there is little evidence that the U.S. has suffered as a result of this pact. Quite the contrary, the evidence points to significant gains by labor, farmers, and industry.
The agreement between the U.S., Canada, and Mexico was inspired by the European Union's reduction in trade barriers between its members. NAFTA created the largest, most successful free-trade zone in the world. From 1993 through 2006, U.S. exports to NAFTA partners increased by 157%, far ahead of our 108% growth in exports to the rest of the world. Last year, U.S. exports to NAFTA partners accounted for a full 35% of total U.S. exports.

The trade growth contributed to an era of general prosperity. From 1994 through 2006, the average unemployment rate in the U.S. was 5.1%, down from 7.1% for the previous 12 years. At the same time, U.S. manufacturing output rose by 63% in the 12 years since NAFTA, as against 37% in the previous 12 years.

Against the wishes of our neighbors, Mr. President-elect, you want to reopen the treaty to force Mexico and Canada to do more to promote labor unions and boost benefits so that higher-paid U.S. union workers can better compete with them.

Not only is this an attack on their sovereignty, it is a transparent attempt to shield union employees from competition from lower-paid, more productive foreign labor. We hope, as one of your advisers has implied, that you were not serious. Constraining free trade would do the economy far more harm than good.

6. Improve Financial Regulation
At some point, you should consider a thorough overhaul of America's patchwork of financial regulatory agencies, with the aim of simplification and accountability. But right now, you need to focus your attention on two specific areas.

First, deal with credit-default swaps. The CDS market, where participants in effect trade the credit risk of corporate bonds, averted a near-fatal meteor strike in mid-September when, within two days, major swaps dealer Lehman Brothers filed for bankruptcy and the largest seller of credit default swaps, insurer AIG, was unable to satisfy its margin obligations on billions of dollars worth of CDS losses. Only a government bailout of AIG saved the day. (See related story, Defusing the CDS Bomb.)

You should order the SEC to crack down on abuses by speculators in this important market. Short-sellers of stocks appear to have been manipulating the CDS market to drive down stocks. This must be stopped immediately, and is easy to do.

Also, you need to show strong support for an effort now underway among regulators to establish a central clearinghouse for credit-default swaps. Last week, regulators said that at least one will be up and running by year end. This effort must proceed and be expanded. It could go a long way to letting buyers of the swaps be sure that the sellers, or insurers, have the money to settle any claims in the event of a major credit default. That would eliminate much of the "counterparty" risk that exists today.

Likewise, the CDS market's opacity must be replaced by real-time reporting of transaction prices, position sizes and collateral adequacy. This market should never again place the American financial system in peril.

Short-selling of stocks also requires some attention. While the shorts, who bet on stocks declining, play a useful role in the market -- often digging up unflattering information that investors need to know -- the practice can be abused and exacerbate big market declines.

First, the SEC should require exchanges to say which trades are short sales, on a tick-by-tick basis. Next, the agency itself should release data on trade settlement failures more frequently than just once a quarter. That would spotlight stocks where "naked" short-sellers, who sell shares even before borrowing them, fail to deliver on their trades. And short- interest levels in stocks should be disclosed more frequently than just once a month. Finally, the agency should insist that Form 13F filings by hedge funds disclose short positions as well as long positions.
Georgetown University finance professor James Angel offers a modest suggestion for a circuit breaker in times of panic selling. When a stock price falls 5% below the previous day's close, traders would have to prove they've borrowed shares before making a short sale. The requirement would prevent naked short-sellers from piling on to a collapsing stock.

7. Change Fuel-Efficiency Rules
It's fine to press for more fuel-efficient cars in the long run, but right now, you should follow a suggestion made by our colleague Holman Jenkins of the Wall Street Journal: Have Congress repeal the two-fleet rule, a protectionist measure that discourages American companies from importing fuel-efficient cars manufactured in its plants overseas, like the Ford Ka, a very popular European mini-car made in Poland. That way the Big Three would have, after minimal tinkering to make the vehicles match U.S. safety and emissions standards, a superb, fuel-efficient lineup for U.S. consumers while retooling to provide us with alternative-fuel vehicles.

The rule, which dates back to the 1973 Arab oil embargo, requires car manufacturers to produce a fleet of cars that on average meets a specific fuel-efficiency standard called the Corporate Average Fuel Economy, or CAFE standard. For instance, the Chevrolet Cobalt gets over 30 miles per gallon on the highway and the Cadillac SRX with four-wheel-drive gets around 20 miles per gallon, with other makes and models of GM cars generally somewhere in between. But the entire fleet meets the 27.5 mpg goal.

Right now, a U.S. car maker can't import a small car from one of its plants in Eastern Europe, where labor costs are low, sell it here, and have it count toward the CAFE goal. The original idea was to force the Big Three to build lots of small cars here. But as recent events have shown, this bit of union-endorsed centralized planning didn't work. We could lower our demand for foreign oil sooner by lifting the protectionist measure.

8. Keep Union Ballots Secret
Prove you are not beholden to special interests by promising to veto any "card-check" plans favored by the labor unions. Mr. President-elect, if you want stock markets to rebound, follow our advice and make this clear to investors as soon as possible.

You should echo the sentiments of former Democratic presidential contender George McGovern, who in an Aug. 8 op-ed piece in the Wall Street Journal said, "The legislation is called the Employee Free Choice Act, and I am sad to say it runs counter to ideals that were once at the core of the labor movement. Instead of providing a voice for the unheard, EFCA risks silencing those who would speak."

The key provision of such legislation would change the way unions are organized. Instead of secret ballots, union organizers would merely need to gather signatures on cards from more than 50% of workers in the workplace. This system invites enormous abuses. As McGovern pointed out: "There are many documented cases where workers have been pressured, harassed, tricked and intimidated into signing cards that have led to mandatory payment of dues."

The secret ballot allows a worker to vote his conscience and not be cajoled and intimidated by a bullying mob or persecuted for standing alone on an issue. The card-check proposal would breed tyranny and lead to higher labor costs, dramatically slowing the formation of new business in America. Like it or not, we are competing in a global economy, not a closed one, and America would be less competitive.

You co-sponsored card-check legislation as a senator. You promised unions while on the campaign trail that you would sign such legislation into law. You have more responsibility now and should be considerably more circumspect. This proposal is a job-killer, not a job creator. It is designed to fatten union coffers, not encourage innovation and investment.

You were elected by secret ballot, why can't unions face elections the same way?

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