As Wall Street closed nearly 500 points down and seemed on the verge of sliding into the New York Harbor Monday afternoon, the campaigns of Sens. Barack Obama and John McCain sought to draw voters into two very different conversations about the financial crisis.
Obama aims to pin the blame squarely on the Republican Party’s philosophy of deregulation and to argue that his policies could have worked, and will work, to avoid such crises. McCain, meanwhile, hopes to turn the conversation from the financial crisis to the broader economy and to make the case that his tax cuts on the wealthy and on corporations would stimulate the economy where Obama’s plan would slow it. Both candidates are blaming insiders and influence-peddlers and are casting themselves as the true reformers.
The bankruptcy of one top investment bank and sudden sale of another is widely viewed as shifting the presidential contest onto the turf of the Democratic Party, much as Russia’s invasion of Georgia last month played to traditional Republican strengths. Obama has cast the crisis — and McCain’s insistence Monday that the “fundamentals” of America’s economy are strong — as evidence that McCain is both wrong on the issues and personally detached.
And both candidates Monday called for tougher government regulation — a stance antithetical to President Bush’s approach to finance. For Obama, it wasn't strikingly different than his longstanding calls for tougher regulation of Wall Street, but for McCain, it was a departure for a candidate who has typically campaigned on easing, not tightening, regulation.
“The core issue is pretty easy to understand,” Obama’s senior economic adviser, Austan Goolsbee, told Politico. “We've just spent the last eight years operating on the premise that the government shouldn't be in the business of setting the rules of the road.
“We're going to make clear that this is what happens when you follow this philosophy, and it's the same philosophy,” he said.
Goolsbee called an ad McCain released Monday promising “tougher” regulation “pretty cheeky.”
“McCain spend the last year-and-a-half either saying nothing or espousing sympathy for the viewpoint that government oversight and regulation were the problem,” he said.
By contrast, McCain’s top economic adviser, Douglas Holtz-Eakin, cast reforming Wall Street as a secondary question. “Obama’s proposals are bad for the economy, and there’s no amount of regulatory reform that will substitute for a strong economy,” he said. “That’s the contrast — it’s the central one.”
He said that from expanding trade to cutting taxes on the investors and businesses, McCain’s proposals would expand the economy.
“There will be no substitute for creating jobs and having the economy grow. That’s the underpinning of any sound banking system,” he said.
With the crisis already deep, the two candidates don’t differ greatly in their short-term approaches.
Neither has backed a government bailout for the bankrupt Lehman Brothers. Neither candidate has called for outright privatization of mortgage lenders Fannie Mae and Freddie Mac, although McCain has inched closer to endorsing the idea.
"Enduring reform of Fannie and Freddie is a key first step," McCain and Palin wrote in a Sept. 9 Wall Street Journal op-ed. "We will make sure that they are permanently restructured and downsized, and no longer use taxpayer backing to serve lobbyists, management, boards and shareholders."
Obama addressed their future the weekend before last, saying, "We must ensure that any plan clarifies the true public and private status of our housing policies."
They may expand on their plans soon, however. Both are expected to sen representatives Thursday to a convention of the Financial Services Roundtable, an industry group, and to fight out the economic crisis in sound bites and policy papers.
Neither candidate has delved deeply into the specifics of reform.
"While both campaigns have put out general comments, I believe both campaigns should develop plans to strengthen the current regulatory system,” said Scott Talbott, senior vice president for government affairs at the Roundtable.
The candidates’ conflict over the economy in the coming days is likely to continue, though, in part as an argument over what they’ve stood for so far. Obama, in no small measure because of his close ties to officials at some key investment banks, has long had a detailed, expansive policy on financial regulation.
“Our free market was never meant to be a free license to take whatever you can get, however you can get it. And so from time to time, we have put in place certain rules of the road to make competition fair, and open, and honest,” he said in a speech at NASDAQ a year ago. “In recent years, we have seen a dangerous erosion of the rules and principles that have allowed our market to work and our economy to thrive.”
McCain, by contrast, has called in general for removing “excessive” and “intrusive” regualtions but began to address financial regulation specifically when the federal government was forced to bail out the investment bank Bear Stearns in March. And then, his first suggestion was something other than more regulation.
“In financial institutions, there is no substitute for adequate capital to serve as a buffer against losses. Our financial market approach should include encouraging increased capital and financial institutions by removing regulatory, accounting and tax impediments to raising capital,” he said.
Holtz-Eakin said that requiring institutions to have more capital would be part of a “tougher” McCain regulatory approach, along with higher standards for transparency and accountability.
He also disputed Goolsbee’s claim that McCain is a longstanding or reflexive foe of government oversight.
“He’s been in a position to do regulatory policy at [the Senate Commerce Committee] and has a record of balancing” regulation with business interests, he said.
Observers remained uncertain whether McCain was actually promising a tougher regulatory regime.
"Is his code ultimately code for regulate smarter, or regulate less? I can't parse that,” said Jeremy Stein, a professor of economics at Harvard. “Beyond the rhetoric, he may not have the stomach for doing much."
McCain is also seeking to claim that, in the words of a recent campaign advertisement, “Only proven reformers John McCain and Sarah Palin can fix” the crisis.
But the financial crisis has also raised an uncomfortable specter from McCain’s past: The last American financial meltdown, the savings and loan crisis of the late 1980s and early 1990s. Then, McCain fought regulation while cultivating friends in the savings and loan industry, and narrowly escaped an end to his political career in the indictment of a wealthy supporter, Charles Keating.
Democrats Monday were eager to recall the scandal.
“Obviously McCain got his Ph.D. in market meltdowns from Professor Charles Keating,” said Jim Jordan, a Democratic consultant.
“He has basically dedicated his career since that moment to the cleaning up of Washington,” Holtz-Eakin said. “A major theme of this campaign is that we have now two candidates, Palin and McCain, who are dedicated to the kinds of reforms that are going to be necessary.”