New President, same inadequate economic tools: James Saft

James Saft is a Reuters columnist. The opinions expressed are his own.

By James Saft

LONDON (Reuters) - U.S. President-elect Barack Obama will have to confront the same intractable economic problems with the same inadequate tools.

The banking system remains impaired and will require more taxpayer support. The impact of one percent official interest rates will still be blunted by the congestive failure of banking. There also isn't much more in interest rate to cut before the United States looks rather, well, Japanese.

House prices are still falling and will continue to wear away at banking solvency.

Stimulative spending by the government will help, but it too can only do so much. Consumers are likely to use a fair part of any new government checks to pay down debt and save for coming difficulties, rather than rushing out to spend. Infrastructure projects, while sorely needed, will take quite a bit of time to get up and running.

The international economic situation has also deteriorated rapidly, taking away demand for U.S. products. What's more, there is a very real risk some time in the next year foreigners become less willing to finance the massive borrowing the United States will need, imposing a limitation Obama's predecessors were lucky enough not to face.

U.S. borrowing plans and debt obligations have mushroomed in the past six months, as the country moved to bail out its financial industry and provide some limited succour to consumers. Taking mortgage companies Fannie Mae and Freddie Mac into conservatorship has also at a stroke hugely increased the amount of debt for which the taxpayer is effectively on the hook, though without much improving the flow of mortgage money to a housing market that is still falling.

While marketable government debt securities were only about equal to 30 percent of gross domestic product at the end of 2007, if Fannie and Freddie debt is included that figure now hits closer to 75 percent. There is also a $700 billion (445 billion pound) bank bailout to finance, as well as Obama's $175 billion stimulus package, which could easily end up being considerably bigger.