Can He Save Capitalism?

The new U.S. president will be judged by whether he can save capitalism.

The great sociologist Max Weber described the power of charisma as “a certain quality of an individual personality, by virtue of which he is set apart from ordinary men and treated as endowed with supernatural, superhuman, or at least specifically exceptional powers or qualities.” Some of Barack Obama’s supporters have at times sounded as if they saw “the One” in these terms. His birth, background and eloquence, they believe, give him almost magical qualities. There’s no doubt that Obama is intensely charismatic and that it provides him with unusual political capital.

But very soon—say on Jan. 20, 2009—his powers will start to mutate, and they will derive less from his persona and more from his office. He will shift, in Weber’s terminology, from wielding charismatic authority to legal authority.

In January, Obama will gain the authority to run the government of the United States of America, and that is why he sits atop this list. No matter how charismatic, were he the president of Kenya, he would not be in this position (or, like the real president of Kenya, not even on this list). For all its problems, for all the battering it has taken, the United States remains the single most important country in the world—able to exercise influence in every realm and on every continent in a way that no other major power can. It remains, in the words of the German writer Josef Joffe, “the default superpower.” Add to this Obama’s special qualities, and the relief much of the rest of the world feels at seeing the end of the Bush administration, and you have a heady combination.

But presidents cannot simply remain charismatic symbols. They are forced to tackle the problems at hand, and their influence then grows— or ebbs—based on how they handle those challenges. However impressive they were as human beings, it was not in being but in doing that George Washington, Abraham Lincoln and Franklin Roosevelt built their enormous reputations. Whatever Obama may have thought when he began this journey, at a time when the war in Iraq was foremost in many voters’ minds, whatever his campaign promises, his presidency will be judged on how he handles the economic crisis that now envelops the United States and the world. For Obama to be remembered as a great president, he has to do nothing less than rescue capitalism.

The first task is perhaps the most difficult: to restore confidence to Americans, and indeed to the world. While there has been much elation over Obama’s election, there remains a deep pessimism across the country that is having adverse effects on the economy. People and corporations are still not doing much by way of buying, borrowing or lending —the heartbeats of modern capitalism. The political system has moved on to the automobile bailouts and the fiscal stimulus, but the original problem of trust in the financial system has still not been fixed. “Credit markets are still fundamentally broken,” says David Swensen, chief investment officer of Yale University.

How to restore confidence? It’s not as easy as it sounds. After all, George W. Bush has pretty consistently projected an air of confidence, one that tends to get people even more worried than they need to be. Perhaps this is because Bush’s calm often seems utterly disconnected from the realities around him; he appears thoroughly unaware of the facts on the ground, whether in Iraq, Louisiana or Afghanistan. Like Bush, Franklin Roosevelt also projected optimism, but he took great pains to recognize and describe the depth of the difficulties the country faced. In his first fireside chat, Roosevelt explained the basics of banking to the American people and then asked for their help in getting the system working again. “It is your problem no less than mine,” he said, enlisting them in the cause at hand.

The next step is to give people a sense that the financial system is stable and predictable. Swensen, who after Warren Buffett is perhaps the most successful investor in recent decades, argues that this has been the crucial flaw in the Bush administration’s actions. “Markets need certainty and predictability,” he says. “And the administration’s actions have actually increased uncertainty and unpredictability. Its measures have been ad hoc, its response to each institution has been different, its reasoning has been opaque—all this creates confusion, and that drives capital away.” Swensen’s own solution is a simple and systemic one: have the government guarantee all money-market funds, with no limits, for six months. He argues that the government has to eliminate some degree of risk in order to get people to borrow and lend again. “Right now the government is not facilitating private capital flows; it is substituting for private capital flows. That doesn’t solve anything.”

The final way that Obama can create confidence is to reform the system itself. His administration will inherit a government that has taken on an extraordinary set of obligations in the private sector—ownership in banks, guarantees of commercial debts, loans to the automobile industry. Carefully retreating from these obligations to restore a market economy will be as complex an exit strategy as the one from Iraq. But if Obama is able to reform government rules and regulation—and thus the American economy—it will give people around the world renewed confidence in the American system. It was only after Japan was able to put in place a new system of tough auditing, after all, that its own banking crisis abated.

Obama will find many dire challenges in his inbox, but none—not Iraq, not Russia, not Pakistan, China, Afghanistan—is as important as this one huge task: to restore confidence, certainty and reform to America. It’s a lot easier said than done. But if he manages to pull it off, people might well start wondering whether Barack Obama has some supernatural powers after all.

By Fareed Zakaria

http://www.newsweek.com