No rest for Obama as "fiscal cliff" looms

No rest for Obama as "fiscal cliff" looms

No rest for Obama as "fiscal cliff" looms

Updated 8 November 2012, 10:44 AEDT

With a second term in the White House now secured, US president Barack Obama has arrived back in Washington to face a looming financial crisis and a bitterly divided Congress.

His most pressing challenges are all too familiar - a still weak economy and almost 23 million people out of work.

There are also sharp differences with Republicans in Congress over taxes, spending, and the US's massive deficit.

While voters have given Mr Obama four more years, they have also elected a divided Congress, with Democrats still in control of the Senate and Republicans in charge of the House of Representatives.

The biggest challenge is the so-called fiscal cliff - a combination of $1.2 trillion in spending cuts and tax increases that are set to take effect in January and threaten to send the country back into recession unless the president can cut a deal with Republicans in the Congress.

Overnight Mr Obama called congressional leaders from both political parties to express his commitment to work together on curbing the deficit and reducing taxes.

"The president reiterated his commitment to finding bipartisan solutions to reduce our deficit in a balanced way, cut taxes for middle-class families and small businesses, and create jobs," a White House official said in an email.

"The president said he believed that the American people sent a message in yesterday's election that leaders in both parties need to put aside their partisan interests and work with common purpose to put the interests of the American people and the American economy first."

Mr Obama spoke to Republican speaker of the House of Representative John Boehner, Senate majority leader Harry Reid, Senate Republican leader Mitch McConnell and House Democratic leader Nancy Pelosi, the White House said.

Mr Boehner and Mr Reid have begun tentative discussions aimed at heading off the potential economic disaster of the fiscal cliff, which will automatically come into play in two months unless action is taken to avert it.

Mr Reid said he had conferred on Wednesday morning (US time) with Mr Boehner and both had agreed not to "draw any lines in the sand" for the time being.

At the same time, Mr Reid stressed that Democrats were not likely to budge from their standard negotiating position, that tax increases should apply to the wealthy, not those in the middle class or below."

"We're really anxious to get moving on, first of all,  dealing with, the first things first, this fiscal cliff," vice-president Joe Biden told reporters travelling with him, according to a pool report. "I think we can do it."

Mr Obama won re-election despite the highest unemployment rate of any president since Franklin Roosevelt in 1936.

He is only the second Democrat since then to win a second term.

Norm Ornstein, a resident scholar at the American Enterprise Institute, says Americans still blame former president George W Bush for the state of the economy more than they do Mr Obama.

"There was a more sophisticated sense that the economic troubles that we have now are not typical of a recession but are deeper and more complicated and there is more of a willingness I think to give a president more slack, a little bit more time," he said.

But Mr Ornstein doubts Republicans will be in a mood to cooperate in crisis talks to avoid the "fiscal cliff" scenario.

"What he's going to have to do is use maybe more of a public approach, using the pulpit, going out to the country to put some pressure on those House Republicans," he said.

While Wall Street had factored in the president winning a second term, investors have been unnerved by the still bitterly divided Congress and little prospect for compromise.

Wall Street's main indices all closed down more than 2 per cent this morning amid fears the partisan bickering will prevent compromise.

Bank and defence stocks fell on a sell-off by investors who had bought those sectors in hopes Republican Mitt Romney would win.

Phil Orlando, chief market strategist for equities at Federated Investors, said the market is asking, "What happens next?"

"We just sent the same folks back to Washington. What did they learn in the last two years that will allow them to act differently in the last two months?"

For now, his peers predict market volatility as investors react to duelling headlines about the likelihood of a solution.

"Positive sentiment will move to worries about the fiscal cliff and the ongoing eurozone debt crisis, resulting in market choppiness over the near term," Martin Sass, chief executive of New York money manager MD Sass, said.

UBS market strategist Jonathan Golub said officials will probably focus on avoiding the cliff, but added that trying to run from the problem will highlight the need for a "grand bargain" to fix the deficit.

Hedge fund manager Whitney Tilson, one of the only managers in the $2 trillion industry to publicly endorse Mr Obama's re-election, said he was optimistic a compromise was possible.

"This was a victory for moderates," he said.

"I hope both parties recognise this and move toward each other - to the centre - to address the pressing problems our country faces."