Obama considers Geithner, Summers for Treasury

Timothy Geithner, president of the Federal Reserve Bank of New York, former Treasury Secretary Lawrence Summers and former Federal Reserve Chairman Paul Volcker are among those being considered for the Treasury post.

After an election victory on Tuesday that will make him the first black U.S. president, Obama also appeared to be getting close to announcing his chief of staff.

U.S. Rep. Rahm Emanuel of Illinois, a Democratic lawmaker known for this hard-charging style, has been offered the job of leading Obama's White House staff, according to Democratic sources who spoke on condition of anonymity.

The 48-year-old congressman has close ties to Obama's inner circle and is a fellow Chicagoan. He was expected to accept the job, which would make him the gatekeeper to the Oval Office.

Obama has already launched a transition team that was working fast to fill the next administration's economic and homeland security teams, according to one of the Democratic sources.

Heading up that team are Valerie Jarrett, a close friend of Obama, Pete Rouse, his U.S. Senate chief of staff and John Podesta, former chief of staff to Bill Clinton.

Amid the worst financial crisis since the Great Depression, Obama wants to move quickly to be prepared to handle a probable recession and the wars in Iraq and Afghanistan.

Obama's office is maintaining secrecy on the transition, which is occurring in the 11 weeks before January 20, when he will be sworn in as successor to President George W. Bush.

Whoever gets the Treasury job will be faced with guiding the $700 billion economic bailout package and the regulatory reform needed to prevent a repeat of the current crisis.

In addition to Geithner, Summers and Volcker, the short list for Treasury includes former Clinton administration adviser Laura Tyson.

Obama could soon announce other economic posts as well. Likely to end up in top advisory roles are University of Chicago economist Austan Goolsbee and Jason Furman, a former economic adviser to President Clinton.

FOREIGN POLICY ADVISERS

For secretary of state, Massachusetts Democratic Sen. John Kerry, former diplomat Richard Holbrooke, outgoing Republican Sen. Chuck Hagel and former Georgia Democratic Sen. Sam Nunn are among the names in the mix.

James Steinberg, a former Clinton adviser, is a top contender for national security adviser. Susan Rice, another former Clinton aide, could be considered for that job or another senior post.

Obama also has relied heavily on three foreign policy experts on his campaign staff who are likely to end up in the White House or the State Department. They are Mark Lippert and Denis McDonough, both former Senate aides, and Ben Rhodes, Obama's foreign policy speechwriter.

With wars under way in Iraq and Afghanistan, Obama might consider keeping Robert Gates on as secretary of Defense. He might also consider tapping former Navy Secretary Richard Danzig, a close adviser.

What Obama's Top Priorities Mean for Your Finances

As America's 44th president, Barack Obama will have one of the most challenging “to do” lists of any new Oval Office occupant in at least a generation. But before Obama can begin implementing the key aspects of his campaign's domestic agenda -- increasing healthcare insurance coverage, improving education, dealing with climate change -- he must try to kick-start a struggling economy that’s sinking into a terrible recession.

And he must do it as quickly as possible, given the worsening job market. Some sort of fiscal stimulus package might get passed when Congress returns from its autumn recess. But that will probably be merely an appetizer before the Democratic majorities in Congress send up a full-course meal of government aid to the new president soon after Obama takes the oath of office on Jan. 20, 2009.

“Although our recommendation is a $300 to $500 billion package, our current expectation is only about $200 billion,” explains economist Jan Hatzius of Goldman Sachs in a recent analysis. Such a package would most likely include infrastructure spending, financial aid to state and local governments struggling with lower property tax revenue, and tax rebates to middle- and lower-income individuals. Would President Obama sign such a pricey bill, with Uncle Sam already facing a budget deficit of $1 trillion or more next year because of the $700 billion bank bailout? You bet. A rotting economy can be poison to any new administration, sapping it of public support.

But stimulus is only one of many economic issues on Obama’s presidential priority list. Others include:

Helping homeowners. Wall Street got its megabailout, but what about Main Street? Many economists say that the plunging housing market and the deluge of foreclosures remain at the core of America’s economic troubles and the credit crisis. During the campaign, Obama favored a 10 percent universal mortgage credit, but Daniel Clifton, an analyst with the Strategas Group, expects Obama to consider a range of options to bolster falling prices, such as an expanded home purchase tax credit, a moratorium on foreclosures, and “and potentially a large-scale refinancing housing proposal.” Among the various refinancing possibilities: using Fannie Mae and Freddie Mac to refinance the mortgages of all the “underwater” homeowners whose homes are now worth less than their mortgages. That could cost $50 billion or more. Others have suggested refinancing everyone into mortgages with a low, low rate. That could have a $300 billion tab. Expect Obama do something, though. Word has it that his advisers have been reading up on the New Deal. One of FDR's first moves during the Great Depression was helping homeowners avert foreclosure.

Cutting some taxes, raising others. Back in 1992, candidate Bill Clinton promised a big middle-class tax cut, but President Clinton never delivered. He instead focused on cutting the deficit. Don't expect such a switcheroo this time around. One of Obama's key criticisms of the Bush administration was that the middle class has seen a decline in its standard of living. With incomes flat or falling, the Democratic nominee explained, Americans were forced this decade to run up big credit card bills and borrow against their homes. Of course, who gets a tax cut -- actually a refundable tax credit -- is in dispute, with several different income ceilings being mentioned during the closing days of the campaign. One group that won't get a cut is households making $250,000 or more. Obama has promised to roll back the 2001 and 2003 investment- and income-tax cuts for those folks. Keep in mind, though, that a weak economy could provide reason to leave upper income-tax rates where they are until the Bush tax cuts expire at the end of 2010.

Creating jobs. With the unemployment rate currently at 6.1 percent and predicted to rise to 7 percent or higher, Obama will also move fast to implement his energy and infrastructure spending program, which is supposed create 5 million green jobs and ensure stronger economic growth into the future. He wants, for example, to invest $150 billion over 10 years to advance clean energy technology, as well as $10 billion per year for five years in a government-run, energy-themed venture capital fund. Then there is a $60 billion effort to shore up America’s crumbling roads, bridges, and electricity grid. Obama advisers promise that, despite the big budget shortfall, the jobs program will stay intact.

Fixing healthcare. Like the previous Democratic president, Obama has made healthcare reform a key part of his agenda. Though it may be one of the most complicated and politically dicey issues he has to tackle, look for Congress to quickly give him the opportunity to sign a renewal of an expanded version of the popular children's health insurance program. That would a first big step toward the full-scale revamp of the health insurance system that he has promised.

Picking an economic team. Who is going to help President Obama turn the economy around? Among his possible picks for Treasury secretary are former Clinton Treasury Secretary Lawrence Summers, former Federal Reserve Chairman Paul Volcker, New York Federal Reserve Bank President Timothy Geithner, and JPMorgan Chase CEO Jamie Dimon. Also expect his current top adviser on money matters, Jason Furman, to lead the White House economic team.

Stocks likely to recover no matter who's president

When it comes to the stock market -- especially this turbulent market -- does it really matter who is elected president?

Yes and no. Politicians do influence the economy -- and they'll play a big role in how the country emerges from this current crisis. But analysts say neither presidential candidate can be a cure for what's ailing Wall Street.

"The economy is a big, big machine, and the president is one government bureaucrat," said Ron Florance, Wells Fargo Private Bank Director of Asset Allocation.

Moreover, most analysts believe the battered stock market has nowhere to go but up next year, no matter who ends up in the White House -- and history will probably give the victor credit even if he actually had little to do with the rally.

"The timing couldn't be better," Florance said.

Still, the stock market is just one part of the economy, and under either Barack Obama or John McCain, the United States needs to recover from a downturn whose severity has not yet been determined. And either candidate will face a budget deficit of around $500 billion when he's sworn into office -- a shortfall expected to climb to $1 trillion next year.

Because of the deficit, the financial climate might end up affecting the new president's policies more than his policies will affect the financial climate.

"This whole financial crisis will largely serve as an agenda buster for at least the first year," said John Lynch, chief market analyst at Evergreen Investments.

That's not to say, of course, there aren't differences in the impact McCain or Obama would have on U.S. businesses, and in turn, their stocks. Robert Froehlich, an investment strategist at Deutsche Bank, said it's likely that under Obama, the alternative energy sector would do well, and possibly the paper and steel industries if he enforces trade treaties. And under McCain, Froehlich said, it's likely that big energy companies would do better because he does not support a windfall profits tax, and that financial companies could benefit because of his stance on dividend taxes, long-term capital gains taxes, and estate taxes.

"Don't expect the next president to say, 'I'm strapped with this economic crisis, I'm going to throw all my plans away,'" Froehlich said.

There are historical trends one can draw between presidents and how the stock market performs. The question is how seriously to take them.

The Dow Jones industrial average and the broader Standard & Poor's 500 index have posted larger returns during the terms of Democratic presidents. But this statistic doesn't prove that Democratic policies boost the stock market -- the major indexes have also done better under a Republican Congress than a Democratic Congress.

Another pattern to take note of is the stock market's apparent four-year cycle, described by market historian Yale Hirsch in his Presidential Election Cycle Theory. The theory says the stock market does well in a presidential election year, badly in the year after the election and then improves until the next presidential election. This pattern has held up for most of the century, although it's being tested by the two terms of President George W. Bush.

However, the monetary policy of the Federal Reserve, rather than the influence of the president, can explain this pattern better, according to a 2007 study by CFA Institute Education managing director Robert Johnson, University of Wisconsin professor Scott Beyer and Northern Illinois University professor Gerald Jensen. Their study found that the Fed has tended to lower interest rates during the latter half of presidential terms -- and lower interest rates encourage borrowing and spending.

At the end of the day, using the returns under previous presidents to predict the market's performance under another president gets to be like reading tea leaves. You'd probably do just as well basing your investments on next year's Super Bowl -- Wall Street's infamous "Super Bowl Indicator" postulates that a victory by a team that was part of the original National Football League, before it merged with the American Football League in 1970, will result in better gains for the stock market. It's actually been right most of the time.

The lesson, of course, isn't to base investment choices on a football game. (Anyone who rushed to buy stocks after the New York Giants' win in 2008 probably got pretty burned). Rather, the point is that correlation isn't the same as causation.

And investors shouldn't get too caught up in the market's short-term reaction after the election results. The Dow surged, for example, after President Hoover was elected in 1928 -- and the next year the it crashed, ushering in the Great Depression.