THE FRIDAY INTERVIEW:BRIAN COWEN'S super-sized guarantee for the Irish banking system angered some of his European counterparts but the policy finds a staunch friend in Robert Shapiro, an economic adviser to Barack Obama's campaign and a former US under-secretary for commerce

"I kind of saluted that," Shapiro says, the morning after Obama's second televised debate with John McCain. "To me that said Ireland continues to have the determination and will to pursue the course that is necessary for its own progress."

Shapiro will be in Dublin on US polling day, November 4th, speaking at a conference in the Smurfit Business School on foreign direct investment (FDI). He has plenty to say about the things Ireland must do to continue to make best use of FDI. But election talk is everywhere this week, as is the whirlwind of turbulence in the financial world.

"The national conversation is now utterly dominated by the economic crisis. Senator Obama is better prepared on this. He has a longer record of saying this would be a central focus of his administration," Shapiro argues.

With the economy centre-stage, Obama has taken a lead in opinion polls. Yet no matter who ultimately takes the crown, the financial disruption will make life in the White House more difficult. "We're going to have the world's largest ever deficit next year . . . It will be somewhere between half a trillion and a trillion dollars."

Shapiro is something of an elder activist in the world of Democratic politics. He worked closely with Bill Clinton and was an adviser to Al Gore. No surprise, then, that he has harsh words for the response of the Bush administration to the current outburst of turmoil.

"They used what I call best-case-scenario thinking for the last two years and that was wrong. No one could have predicted how wrong it could be until it really began to unfold. But even as it unfolded they've been behind the curve."

In Shapiro's account, the $700 billion bailout for the financial system is wrong. It would have been far better, he argues, to respond separately to the panic that has overwhelmed markets and the underlying cause of the credit crunch. "We need to calm the panic by getting more information out publicly."

"A lot of the contraction in credit markets around the world reflects people's enormous uncertainty about the solvency and soundness of the financial institutions and now other non-financial companies. The government needs to get out as much information as possible about the actual state of these institutions in order to give people a sense that it has a grasp on this problem and a response to it."

This could be achieved by developing a mechanism for the Federal Reserve and Federal Deposit Insurance Corporation to certify the financial health of institutions. This approach - "based primarily on getting information out" - would be akin to the response of health authorities to the Sars panic five years go.

As for the underlying cause of the disruption, Shapiro says the bailout will do nothing to prevent the rise in housing foreclosures that prompted the crunch in the first instance. Fixing that, he argues, might involve the provision of direct loans to home-owners or a renegotiation of loan terms with assistance from Fannie Mae and Freddie Mac, the wholesale mortgage giants now in government protection.

Another option is for the government to "jaw-bone" institutions that lent money to financial groups for the purchase of mortgage securities into swopping their debt for equity. "That should improve the balance sheets of those institutions so that first of all they might be able to begin lending a little more; that is, providing credit to real businesses more."

Shapiro readily accepts that Obama himself strongly endorsed the bailout package - albeit after a lukewarm initial response - but says Obama and his rival had no choice but to back the plan. The legislation would have failed without support from both men, he says. Either candidate "would have been held responsible for the market turmoil that followed" if he voted against it. "That was kind of a no-win."

Asked what specific approach Obama might adopt to resolve the financial crisis if his campaign is successful, he simply says, "it's something that he, I think, will deal with soberly and deftly when he is elected president."

So how would Obama run the US economy and how would his policies differ from the current administration? "It is a public investment-led agenda in which the government takes an active role in supporting and promoting investment in the factors which are common to all industries' efforts to grow," Shapiro says.

For that read copious research and development in the area of clean energy, with rich potential to benefit national security, the environment and to create jobs.

Important also would be infrastructure investment, modernising the national electricity grid and building light-rail systems in metropolitan areas. Shapiro cites a big commitment to public education and training for workers.

As for the looming deficit, Shapiro says the huge shortfall will partly arise from once-off expenditure on the bailout and partly from recession in the economy at large. The government is also likely to provide a spending stimulus, a measure he characterises as a "little counterweight to the downward forces" on the economy.

How soon can the deficit be reversed? "I think he needs to fix it in his first term and I think he will, just as President Clinton did. I have a lot of confidence in that. The US has a lot of underlying economic strengths that haven't gone away. The crisis and the panic have not reduced the economic skilfulness and education of our workforce."

At the same time, exceptional pressures in the US and global economies are already at work in a menacing way in Ireland.

Still, Shapiro points out that these forces are not unique.

A keen student of Ireland's FDI policy, he says the scene has certainly changed from the 1990s. Even though new EU members offer lower costs, he says there remains a significant opportunity for Ireland to take even more from the investment that continues to flow in to the State.

"Not all of the pieces have changed, but two of them had. One is Ireland's really unique position as a low-cost jumping point for US companies into the EU. That combined two things, the combination of being low cost and being a member of the EU," he says. "Now we have other economies who also can be jumping-off points into the EU market that are lower cost. This is a challenge. But the right response is not to lower your wages.

"The right response is two things. One is to provide other factors which the accession countries can't provide yet, which is a more highly educated workforce, better infrastructure, better ways of expediting the business of foreign companies in Ireland exporting both into the EU and back to the United States. In part, because the US has played such a large role in this, you have a language advantage, which is significant.

"The other issue for Ireland, I think, is that Ireland has not succeeded as much as it could in promoting the spill-over from the modernisation driven by FDI.

"By that I mean the adoption of the modern business methods and efficiencies and technologies which foreign companies have brought in, the spread of those to more domestic companies. Ultimately that's the step which any company that depends on FDI must take in order to sustain its economic growth."

As a result, this calls for the introduction of tax incentives to foster the adoption of new technology and new business methods. The fact that companies with newer technology are foreign-owned is irrelevant, he says. The objective should be to reduce the barriers and costs of adopting the most efficient and innovative means of doing business. "This, I think, requires a lot of active policies by Government."

Has the perception of Ireland in US eyes changed as a result of the rise in costs and the pressures on the domestic economy? "I don't have a sense that there's any loss of confidence in Ireland with respect to those issues," Shapiro says.

"The issue of the accession countries is something that's really beginning to emerge now. It's something that's right over the horizon. In part it's because of language. Ireland has the advantage of having enormous concentration of FDI and ancillary companies already present in a number of significant industries. So you've got a lot of sunk investment.

"These concentrations create their own dynamic. I don't think you've got a crisis on your hand. I think you have a need to adapt and take it to the next level."