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U.S. Congress World's Top Risk in 2009

Political risks have historically been most important for economic outcomes in emerging markets, but that's not so this year. The current financial crisis has created an unprecedented space for government interference in economic affairs within developed states, as well. Nowhere is that more true than in Washington.

The most far-reaching reactions to the global financial crisis--the biggest stimulus packages and the policy decisions with the most important economic implications--will come from the United States government. The incoming Obama administration, which has enjoyed an 80% approval rating during the transition, has been welcomed with both enormous relief and enthusiasm. Knowing the range of serious problems that await him, President-Elect Obama has eschewed ideology (and, in many cases, his most committed loyalists) and hired the best advisors available. On the domestic side, the incoming Obama team is not just solid, it's cohesive. Larry Summers and his friends and protégés are a crew of pro-globalization free-traders and centrist technocrats who will take a problem-solving perspective on the crisis. (On foreign policy, Obama fields just as much talent, but not nearly as much of a team. it's a separate point, though...a challenge in places like China, Russia, and--in the headlines right now--the Middle East peace process; that's really a problem for later, not for 2009).

Congress is a different matter. I would make the point that Obama actually got more of a Democratic majority in Congress than is good for him. On Capitol Hill, we also have much more cohesion--and a collective sense that the executive branch of government has seriously overstepped its policymaking authority in recent years. A strongly Democratic (and much more ideologically progressive) Congress will feel the need to respond decisively to the unprecedented nature of the financial crisis to show that it's doing something. In short, Congress will move from a position of stalling administration-led legislation to attempting to exert actual policy leadership. The last time we had serious financial crises, a considerably less cohesive congress both over-legislated and over-regulated, resulting in, among other things, the Sarbanes-Oxley act. This time around, we're likely to see a series of hearings and populist policies that favor consumers over producers, as well as congressional "showboating" on initiatives related to solving the financial crisis.

There are three broad areas to watch. First, we can expect financial industry legislative and regulatory changes--oversight and supervision for credit rating agencies; revision of bankruptcy laws; new regulation of complex financial products and non-traditional financial institutions; and, most importantly, reform of financial regulatory agencies.

Second will be direct government involvement/control over economic enterprises--and in financial institutions given an increase in us holdings; a "car czar"; the criminalization of company failures, hearings/investigations/special prosecutors for underperforming enterprises; and increased scrutiny of energy companies.

Third will be the fiscal policies meant to spur economic growth--implementation of the second half of the tarp package; new infrastructure stimulus and additional spending to ensure congressional support.

By the end of 2009, the critical question will be whether the White House or Congress will have driven most of the lasting domestic economic policy agenda. In even the most optimistic assessment, a combination of economic crisis and a stronger congress means that the balance is likely to tilt considerably from where it has been over the past decade, making the rise of the U.S. Congress the world's top risk in 2009.

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