US faces deep problems

Obama's challenge

The OECD paints a grim picture of the challenges facing the incoming Obama administration, which takes office on 20 January.

It says that "the US economy is going through an exceptionally difficult period" and despite major policy interventions, it is likely that "activity will get worse before it gets better".

The OECD suggests that the weakness will continue well into 2010.

It also warns that "house prices appear to have further to fall, and foreclosures are widely expected to rise."


The real economy is predicted to decline through 2010

The decline in household wealth of about 20%, due to falls in the stock and housing markets, is likely to affect spending and household consumption.

The OECD broadly endorses the need for a further stimulus plan, saying that "macroeconomic policy should stand ready to provide a renewed stimulus".

But it warns that, "given the underlying fiscal situation, the package should aim to be strictly temporary, timely and targeted" - an approach that appears to differ from the plan for big infrastructure projects that President-elect Obama has talked about.

And it adds that in the longer term, "the ageing of the population and other trends put the Federal budget on an unsustainable course" and says that increased tax revenue and controls on spending will be needed.

Financial disruption

The OECD says that "resolving the financial crisis could be a long drawn-out process", which could require substantial government spending just as in previous banking crises.

It says that the "full effects of the forceful easing of monetary policy will only be felt after financial market conditions normalise".

So it argues that big rate cuts by the US central bank, the Fed, "appear to be roughly appropriate in light of the adverse effect on real activity" of the credit squeeze, and says that "monetary policy should remain highly accommodative for quite some time to support the economy and the financial system".

However, it warns that in the long run, the regulatory system needs to be fundamentally reformed, or else the rescue of troubled financial institutions "could inadvertently serve to encourage imprudent behaviour" in the future.

"A major overhaul of regulatory and supervisory policy is necessary to remedy the deficiencies in oversight that the crisis revealed," the report says.

It also calls for reform of the supervision of mortgage brokers, underwriters and credit agencies to protect borrowers and investors.

And it says, more controversially, that in the long-term "it would be preferable to leave the securitisation of mortgages to the private sector," eliminating or reducing the role of the big government-sponsored agencies, Fannie Mae and Freddie Mac, which were effectively nationalised by the government earlier this year.


What is one problem the United States faces in this article? What do you think Obama should do to help?