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The European Commission is due to unveil on Wednesday, 26 November, a proposal for how the EU should address the economic crisis financially, including probably a suggestion that Member States contribute about one percent of the bloc's gross domestic product to fund stimulus measures, including for the auto industry.

The EC Commission will call for "a coordinated fiscal stimulus, based on member states taking measures suited to their own economic situations". The package will thus be financed out of the States’ budgets and will have to be within the boundaries of the EU Stability and Growth Pact limiting national budget deficits. However, it will be permitted to use the Pact’s full flexibility, a signal that high deficits will be tolerated in the short term. "Overall, it's about €130 billion that are to be deployed," according to the German Finance Minister, Peer Steinbrueck. This is an amount superior to the EU's annual budget, which is about €110 billion. "Everyone is to fulfill the one percent target," Steinbrueck added. A decision on the precise nature and amount of the package will be determined by EU heads of states and government during a summit in Brussels on 11-12 December.

By contrast, China’s recently announced $586 billion stimulus package is 14 percent of the country’s estimated 2008 GDP. If the United States were to commit to a stimulus package valued at 1 percent of its GDP, it would amount to approximately $138 billion.

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The Federal Reserve announced two new programs today, committing an additional $800 billion in order to spur lending. U.S. Treasury Secretary Hank Paulson also announced that $20 billion from the Troubled Asset Relief Program (TARP) would be used to support one of the programs. The first, worth $600 billion, is aimed at helping the housing market; and the second Fed program, worth $200 billion, is directed at thawing the frozen consumer credit markets.

The Fed announced this morning that it will "initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae." The Fed will work with "primary dealers through a series of competitive auctions" for purchases of up to $100 billion in "GSE direct obligations" beginning next week. For purchases of up to $500 billion in MBS, the Fed will select asset-managers through a competitive process and plans to start these purchases before the end of the year. The Fed said in a release that it will provide operational details after "consultation with market participants," and added that "Purchases of both direct obligations and MBS are expected to take place over several quarters."

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What will it take to jolt the U.S. economy back into shape? Congressional leaders have floated ideas for an economic stimulus package ranging from $500 to $700 billion. President-elect Obama is not espousing numbers yet but has assembled his economic team and charged it with developing recommendations for restoring economic growth and creating 2.5 million jobs. While serious rumors about his economic advisors started circulating last week, Obama officially presented the group at a noon press conference today:

• Treasury Secretary—Timothy F. Geithner, President and CEO of the Federal Reserve Bank of New York and former long-time Treasury official
• Director of the National Economic Council—Lawrence H. Summers, former Clinton Administration Treasury Secretary and Harvard economist
• Director of the Council of Economic Advisors—Christina D. Romer, University of California at Berkeley economics professor
• Director of the Domestic Policy Council—Melody C. Barnes, former counsel to Sen. Edward Kennedy (D-MA) and policy director of the Center for American Progress
• Deputy Director of the Domestic Policy Council—Heather A. Higginbottom, former legislative director and presidential campaign advisor to Sen. John Kerry (D-MA)

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In a further demonstration that the markets prefer certainty over uncertainty, the likely appointment of Federal Reserve Bank of New York President Timothy F. Geithner as the next Treasury Secretary appears to have calmed the market’s fears to some degree, since the Dow Jones Industrial Average was up 6.5 percent at today’s close. Geithner has worked closely with Treasury Secretary Hank Paulson to address the financial crisis, and insiders predict a very smooth transition from Paulson to Geithner.

The issue of Geithner’s role with Paulson on the more controversial decisions, such as saving Bear Stearns while leaving Lehman Brothers to fail, has been the only point of criticism among otherwise glowing reviews. Geithner has led the New York Fed for five years, and prior to that directed policy at the International Monetary Fund and was a senior fellow at the Council on Foreign Relations. During the Clinton Administration, Geithner served as Under Secretary of the Treasury for International Affairs. He served in various capacities at the Treasury Department from 1988 to 2001. While he represents change, Geithner brings a depth of Treasury experience that may be reassuring to many.

In other news, Congress left for the Thanksgiving holiday but first gave the Big Three automakers the homework assignment of "writing a plan for viability" by December 2nd. If the plans demonstrate that the domestic automakers would be a sensible, long-term investment for $25 billion worth of taxpayer loans, Congress will return to Washington on December 8th to pass auto bailout legislation. House Speaker Nancy Pelosi said Congress will also begin work on an economic stimulus proposal that will be ready to go at the start of the 111th Congress.

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The G20 meeting in Washington, DC did what it was supposed to do—it constituted the starting point for a process to re-model the global financial architecture unanimously supported by the attending nations. By expanding the group of countries present to 20, the organizers managed to include all leading and emerging economies in the process. This will no doubt become important during the ensuing efforts to achieve global legitimacy for the process.

The German Chancellor Angela Merkel after the meeting reported that, "Over the next 100 days the G20 states intend to take about 50 emergency measures…The action plan adopted in Washington contains important steps that should lead to a global economic order and thus ensure an international dimension of the social market economy."

These views, as expressed by the German leadership are broadly representative of the European view. On 17 November, the UK Prime Minister reported back to the House of Commons along similar lines, emphasizing that:

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In another indication of the knock-on effects of the financial crisis, the auto industry's number one supporter in Congress suffered a preliminary defeat today in his effort to retain a powerful House committee chairmanship. House Energy and Commerce Committee Chairman John Dingell (D-MI) failed to get enough Democratic leadership votes today to retain his chairmanship over challenger Rep. Henry Waxman (D-CA). The Democratic Steering Committee, a leadership organization responsible for determining Democratic committee assignments, voted for Waxman by a vote of 25-22. Waxman is one of the most liberal members of Congress and a champion of environmental issues. Many environmental activists believe that Dingell has spent too long protecting the auto industry, which has resulted in a weakened industry that has failed to produce the cleaner, more efficient cars that consumers want.

The good news for Dingell is he gets a do-over with the full Democratic Caucus which is likely to vote tomorrow to accept or reject the steering committee decision. Dingell believes he has enough votes to prevail over Waxman. The two-dozen incoming Democratic freshmen will participate in that vote, and some believe that Waxman, who endorsed Barack Obama in the Democratic primary, will have more sway with the freshman class. Dingell, who endorsed Hillary Clinton, is expected to draw support from politically moderate members and older members, who are committed to preserving the seniority system.

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While the machinery to oversee Treasury's management of the programs under the Emergency Economic Stabilization Act (EESA) has been slow to gear up, there are signs that the pieces are beginning to fall into place. This comes not a moment too soon, as the clamor from the media and from Capitol Hill for more transparency has been building in the past ten days.

On Friday, November 14th, House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) announced they have picked three of the five members of the Congressional Oversight Panel (COP) established by the EESA. The other two members are to be chosen by House Minority Leader John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY). The fact that the Democratic leaders did not coordinate the announcement of appointments with their Republican counterparts makes it clear that the day of bipartisan cooperation on Capitol Hill has not yet dawned.

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The Senate returns to work today and the House is scheduled to convene on Wednesday. In the past several days, it has become clear that neither significant economic stimulus nor aid to the auto industry is likely to be approved during this "lame duck" session of the 110th Congress. The sticking point appears to be the inability of Democratic leaders to attract sufficient Republican support for either measure.

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The G20 summit on November 15 produced some worthwhile results and set the table for ongoing work in a number of areas.

Perhaps the most interesting outcomes were two that do not necessarily bear directly on the financial crisis, but which speak to underlying issues that need to be addressed going forward. First, to address mounting fears that protectionism may start to creep in to the policies of some countries, the G20 agreed that none of its members would take protectionist steps in the next 12 months. Second, the summiteers agreed to look for ways to re-capitalize the International Monetary Fund (IMF) and to give developing countries more of a role in its governance, thereby reducing the role of Europe.

The leaders agreed that transparency in the markets is important and that monetary and fiscal policy should be used "as appropriate" to stimulate economies while the governments continue to work on re-establishing financial stability.

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With the G20 meeting in Washington, DC (also dubbed “Bretton Woods II”) only a couple of days away, world leaders are working to maintain a balance between managing excessive expectations and scrambling to develop consensus solutions that will allow them to claim at least limited success. While the organizers of the original Bretton Woods meeting in the early 1940s had the luxury of abundant time to develop the blueprint for the world’s financial architecture, present summiteers are squeezed between rapidly falling markets and, at least in the United States, a political power vacuum. President-elect Barack Obama will not attend the summit, nor will he meet with any of the world leaders separately. The Obama transition team has provided few details other than to say the president-elect’s aides will attend the summit and may meet separately with some of the foreign representatives over the weekend.

Several European stakeholders have in the past days issued their suggestions for the development of a new global financial architecture, many of which no doubt will impact the final outcome. The EU leaders met on 7 November and agreed to a common position for the G20 meeting, outlining actions to be implemented within 100 days, starting this Saturday:

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Treasury Secretary Hank Paulson today announced the Treasury Department will assist nonbank financial institutions with Troubled Asset Relief Program (TARP) funds and that the department will not use any funds for the original stated purpose of the program—the purchase of troubled assets from banks. The announcement of his intention to provide assistance to nonbank institutions represents a new step for Paulson. In making the announcement, the Secretary acknowledged that Treasury has not worked through the issue of funding organizations that are not federally regulated, however they are “designing further strategies for building capital in financial institutions,” and he said, “We will also consider capital needs of non-bank financial institutions not eligible for the current Capital Purchase Program.” He focused his remarks on the importance of shoring up the asset-backed securitization market by working with the Federal Reserve to develop a liquidity facility for AAA securities. Paulson acknowledged the need to “get lending going again,” and said, “While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.”

The accompanying announcement that Treasury does not intend to use TARP funds to purchase troubled assets as originally planned was a surprise to most observers. Paulson said he would seek to address the liquidity issues in the mortgage finance market by making additional capital available to banks if those funds were matched with private capital.

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On Wednesday, just one day after Senator Barack Obama won the presidency, the Treasury Department detailed how it planned to borrow a record $550 billion before the end of this year to back the bailout. Treasury said it would sell $55 billion in bonds next week, including a reintroduction of the three-year note—all part of a massive borrowing effort required because of the cost of the bailout and a budget deficit that some believe could hit nearly $1 trillion next year.
The government's surging financing needs are a stark reminder of the challenges awaiting the Obama Administration even as the current administration moves to implement its rescue program and the Fed fine-tunes its approach to the crisis. Treasury Secretary Paulson has pledged to work with incoming administration to ensure a smooth transition.

Treasury gave Congress its first report on the operation of the bailout fund, detailing the $125 billion the government spent last week to buy stakes in nine of the country's largest banks. The bailout legislation requires Treasury to issue reports each time its spending passes a $50 billion marker.

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The election of Senator Barack Obama as the 44th President of the United States casts a new light on transatlantic and international policy, politics, and commerce. While it is too early to discern the policies he will pursue in many areas of international affairs, it is clear the tone coming from Washington will change.

This change may be felt most immediately in the preparations for the G-20 summit on international financial market regulation called by President Bush for 15 November in Washington. The meeting comes at an awkward moment and President-elect Obama is faced with the difficult decision of whether or how to participate in the event. International leaders who will attend face the equally difficult decision of how to engage with the Obama team while they are in Washington.

Even before the election occurred in the US, EU leadership began intense contacts to hammer out the EU’s negotiating position on the future of international financial architecture. The proposal includes some far-reaching measures for new and further regulation of financial markets that, if enacted, would constitute a break with existing philosophy.

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Most people in Washington are carefully tracking political polls today, trying to predict the fates of their presidential and congressional candidates. However, there are others both inside and outside of Washington studying another survey released this afternoon—the Federal Reserve’s quarterly Senior Loan Officer Survey.

The October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices confirms what many have suspected—credit markets are still struggling. Conducted October 2-16, the survey gathered responses from 55 domestic banks and 21 U.S. branches of foreign banks. The survey focuses on two areas:

1. changes in the amounts of commercial and industrial (C&I) loans and
2. changes in credit limits on existing credit card accounts for prime and non-prime borrowers.

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