What now?

Alex Nabaum

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Four essentials
William H. Donaldson ’53

If by January 20 the U.S. credit markets are still not functioning freely, President Obama should order a reexamination of the methods used by the prior administration, modify where appropriate, and then accelerate efforts to "unfreeze" those markets. The new administration should make public the terms and conditions of the loans and grants the government has made to financial and other entities, report on the conformity to date to those terms, and, if necessary, effect terms on any further aid that reflect the conditions to be set by the Obama administration. In addition to mandates on any new government support, there should also be a clear understanding that when the economy returns to health, the government will ease itself out of the role of providing stimulus and federal investment. The U.S. government should not remain a shareholder in U.S. industry beyond the time it is absolutely necessary.

Concurrently, the administration must undertake carefully structured measures to address the housing situation. The economy will not turn around until effective measures are undertaken. A first step would be to identify people who are on the brink of losing their homes and do what should have been done originally, before they were approved for mortgages they couldn't afford: assess their ability to pay. For the sake of the economy as a whole, we need to keep more of these people in their houses. For instance, a 30-year government-guaranteed mortgage could be granted to those who are creditworthy, at rates that are affordable given their incomes.

Clearly, any house bought with excess credit will be worth less today than it was when the homeowners bought it. That will leave a gap: the current value of the house will probably be less than the mortgage it carries. That gap represents a loss that should be shared between those responsible for it, that is, both the homeowners and the original lender.

There are many ways of arranging this -- a second mortgage, for instance -- so that when the house is sold, hopefully in a better future market, the institution that assumed its share of the loss on the original mortgage has a chance to get some of its investment back on a sale. The crucial point is that both the institution that made the original unsound loan and the homeowners who signed it must swallow some of the resulting loss -- the homeowners over the long term, by eventually sharing the ownership value in their home when it appreciates.

Obama's emphasis on infrastructure spending is well placed. The entire infrastructure area is in great need, and an effective infrastructure program is essential for creating jobs and fighting off a still-worse recession. But the projects must be carefully chosen. The more the administration can direct these funds toward forward-looking projects that will benefit the economy and the nation in the long run, the better. In the twentieth century, "infrastructure" was almost synonymous with "highways." That assumption is no longer valid. Our population has grown, and our highways are clogged to the point where commuting time and pollution are having negative effects on economic growth.

We need to start sending our infrastructure dollars to advanced, efficient mass transportation and projects such as bullet trains. Our country has fallen behind Japan and Europe in this arena, and we need to catch up to be competitive. Other infrastructure spending must be subjected to equally rigorous criteria.

Finally, President Obama, through use of the bully pulpit and efforts to encourage mutual cooperation, should seek to unite the world against terrorism. This is an issue as fundamental for the economy as it is for human safety and security. It is especially true now that the horror of the Mumbai attack has shown that it's not just the Western world, but indeed the entire world, that is at risk from extremists. Hopefully President Obama will work to regain international good will for the United States and to draw the nations of the world together in a cooperative, collaborative campaign for protection and peace.

William H. Donaldson ’53, chair of Donaldson Enterprises, has served as chair of the Securities and Exchange Commission, chair and CEO of Aetna, chair and CEO of the New York Stock Exchange, undersecretary of state under Henry Kissinger, and special counsel to Vice President Nelson Rockefeller. He was the founding dean of the Yale School of Management (SOM).