During all the euphoria accompanying Barack Obama’s ascension to the American Presidency, it is worth making a hard headed assessment of what this means for the Global Financial Crisis (GFC)

Although George W. Bush’s Republican Administration will inevitably take much of the blame for the crisis, it is worth noting that Congress, where most US Government spending decisions are made, has been dominated by the Democrat party for some time. In addition, banking analysts have recently noted that the creation of sub prime loans (which were the genesis of the GFC) was actually the result of pressure applied during the Clinton Administration (also Democratic) to mortgage giants Fannie Mae and Freddie Mac. So the resumption of power by a Democrat President does not in itself mean that American financial policies will change for the better.

Another potential economic negative for Obama is that during the election campaign he frequently argued in favour of protecting American industry from ‘unfair’ foreign competition. We are all aware that cheap Chinese manufacturing has dramatically lowered the cost of manufactured goods like TVs, PCs, dishwashers, fridges and soon cars for Western consumers. What is less well understood, however, is that the massive US trade deficit this has created has been largely financed by China lending money back to America to finance further consumption. Without these Chinese loans, the US Dollar would collapse and with it a good part of the international financial system, leading to further economic misery.

If President Obama decides to increase protectionism for ailing domestic industries, he may find the tap of Chinese funding well and truly turned off. One can only hope that like US Fed Chairman Ben Bernanke, President Obama has studied the lessons of the Great Depression of the 1930s. During this period the US Government made the fatal mistake of slashing spending and cutting imports in an effort to ‘preserve’ the economy – but instead the financial misery experienced by US households was extended until the outbreak of World War 2, when increased military expenditure finally made a significant dent in unemployment.

The good news for supporters of Obama is that the GFC has become so bad, it is now more likely to improve rather than worsen. The carnage on world markets has finally resulted in a relatively well coordinated policy response by both governments and central banks, which have injected substantial funds into bank balance sheets while dramatically cutting interest rates to reduce the burden on debt-laden households. President Obama undoubtedly recognises the wisdom of these actions and is unlikely to change policy after appointing his new cabinet. Let us hope that the ambitions of the more radical wing of the Democrats can be kept in check during a period when the Party controls both Congress and the Senate, as well as the White House.