Obama's Leadership Challenge

President Barack Obama may have inherited a financial crisis, but he was elected with a mandate to get the economy and financial system back on track. A month on, his Tuesday address to Congress punctuated a series of initial actions showing a serious commitment to bold moves with measurable results. Yet, a party-line stimulus package and failed bank-rescue-plan unveiling give rise to questions about Obama's leadership style and abilities.

Congressional Democrats demonstrated how anxious they are to lead on banking by attaching executive-compensation restrictions that clash with Obama's own policy preferences as a rider to the stimulus. At the same time, the administration suffered a setback when Treasury Secretary Timothy Geithner's bank-rescue plan was panned. The administration must demonstrate more leadership vis-à-vis Congress if it hopes to retain control of the sensitive banking issue going forward and to bring long-term solutions that will aid what ails America.

Voters are increasingly expecting Obama to deliver economic recovery sooner than they did two months ago. According to Gallup, the number of voters who expect the economy to recover within a year has increased from 16 percent to 24 percent from mid-December until now, with a median expectation of recovery declining from three years out to two years. At the same time, the number of voters who think Obama is moving too slowly on "major problems facing the country" has held firm at only 10 percent between the end of January and now. This indicates Obama has breathing room to deliver results, but the risk of Obama's optimism in his speech to Congress is that voters begin to expect progress sooner than he can deliver. This would eat away at his current 60-plus percent approval rating if the economy stays in the tank, which, in turn, would limit his ability to manage an ambitious legislative agenda.

Obama's first major piece of legislation -- the stimulus package -- should have been a clear victory. Given a strong majority in Congress, even stronger approval ratings and a clear mandate to address the issue, it was apparent from the beginning that the stimulus package would pass pretty much as Obama asked for it, pretty much on time, and with three very easy to identify Republican senators crossing party lines. The process, though, required much more expenditure of political capital than expected.

Leadership affects policy trajectory: Though the Obama administration itself is centrist, that doesn't necessarily translate to policy if Congress exerts strong control over resulting policy. With the stimulus, Congress demonstrated an unwillingness to follow the new president as a matter of course. Obama lost control of the issue for most of the Congressional debate, only to later reassert his positions through a media blitz and face-time scramble that kept the package on track but could not rid it fully of "Buy America" provisions or unwanted revisions to executive-compensation rules. Perhaps more problematically, rank-and-file members of the House of Representatives demonstrated a considerably restrained sense of crisis or urgency that surely did not mirror that of the president, the markets or constituents.

Geithner's bank-rescue plan speech on Feb. 10 further hurt the administration's leadership credentials, at least in the short-term; indeed, the shadow of the speech lingers as investors increasingly move on the latest rumor from Washington. The contrast between Obama's address to Congress and Geithner's speech demonstrates a conflict. Obama's natural leadership style stems from his campaign experience -- where responding with grandiose rhetoric but cautious policy commitments in order to buy enough information to get policymaking right was acceptable. Yet, the type of leadership necessary in an economic situation where mood is critical and markets are seeking decisiveness is much different. Obama and his team have yet to prove they can lead on specifics.

The administration continues to be both guarded and reactive on the future of the nation's major financial institutions. At the same time that it released details on bank stress tests and capital injections, Obama's team has had to scramble double-time -- and often in reaction to the market -- to underscore that the administration does not want to outright nationalize banks. That the administration needs to consistently restate this intention is a result of lost credibility in the eyes of investors, who still have not seen the comprehensive approach to solving the financial crisis promised by Obama. The political risks of a gradualist approach on bank rescue are to the downside, and many are intangible -- persistent uncertainty being foremost among them.

It could prove to be a decisive leadership moment that the administration was willing to take short-term heat -- and market response -- for holding back on specifics rather than committing to specifics that would later be revised. But first the administration has to get there. In the meantime, confidence remains fragile on banking response, and the burden remains on the administration to prove it can lead on the issue. Congress will not hesitate to fill the void with restrictive riders at every legislative turn -- and Obama will hesitate to pick fights in case he has to return to the Hill to ask for further funds.

The more the administration shows ambiguous leadership, the more "big victories" like swift and huge stimulus will be received by markets and the public mutedly. This is far riskier on bank rescue, though, where every word and detail is scrutinized by markets and where specifics of resulting policy matter far more than on stimulus. Even though the president's optimistic address to Congress may have solidified Obama's ambition and determination, on balance, it has still been a bumpy few weeks since he outlined a broad but understandably vague agenda in his inaugural address. How he measures up in the coming weeks, though, will have far greater long-term implications.