Economy back in spotlight for candidates

WASHINGTON — The Democratic and Republican presidential candidates reacted to Monday's stock-market plunge by calling for more federal regulation and criticizing Wall Street, the Bush administration — and one another.

Republican John McCain, campaigning in Florida, initially sought to calm investors, saying, "I think, still, the fundamentals of our economy are strong."

But he soon sounded a harsher tone against his own party, saying that Lehman Brothers' bankruptcy, the cheap sale of Merrill Lynch and reverberations on Wall Street are "a failure of government" and "a failure of regulatory agencies."

Democrat Barack Obama, campaigning in Colorado, said that while he doesn't fault McCain personally for the financial crisis, "I do fault the economic philosophy he subscribes to."

Obama said that President Bush and his Republican Party had insufficiently regulated the lending industry and put too much emphasis on protecting the fortunes of the wealthy.

"Instead of prosperity trickling down, the pain has trickled up," Obama said.

The candidates' remarks reflect their efforts to gain control of an issue of ever increasing importance to voters — and one that both Obama and McCain are having trouble making their own.

In a Gallup poll last week, 48 percent of Americans said Obama can better handle the economy, while 45 percent chose McCain, a significant gain for the GOP nominee: In late August, Obama had a 16 percentage-point margin over McCain on the economy.

Even before Monday's bad news, the economy was the top issue on voters' minds. But over the past two weeks, other issues — Alaska Gov. Sarah Palin being the most obvious — have dominated the political discussion. That phase of the campaign may have ended.

"Interestingly, even though the economy is the mega-issue of this election, no candidate emerges with a real boost from it," independent pollster John Zogby said. "Americans are split on the best remedies and so the issue kind of neutralizes itself. Thus, the election will election will revolve more on character and leadership traits [than the economy itself]."

McCain faces the bigger challenge. As the Republican nominee, he must answer for what has happened on President Bush's watch and offer a plausible explanation for why his conservative administration would be genuinely different. Obama already is attacking him as ill-equipped to deal with the financial crisis and has aggressively moved to tie a future McCain administration to a lobbyist-dominated Washington culture.

Obama's challenge is different. He begins with the reality that Democrats are seen as the party that is more trusted to deal with the economy. Despite that, he has struggled through much of the year to develop a compelling economic message. Where he remains suspect is on the strength of his leadership and his ability to connect with working- and middle-class voters. McCain is playing on those qualms in his counterattacks.

Both, however, have been major beneficiaries of financial contributions from Wall Street, according to the Center for Responsive Politics. The nonpartisan watchdog group, which monitors campaign contributions to candidates for federal office, calculates that Obama has received nearly $10 million and McCain close to $7 million from employees of securities and investment firms. Obama raised $370,000 from Lehman Brothers earlier this year, and McCain got almost $300,000 from Merrill Lynch, according to the center's data.

On Monday, McCain pledged that, along with running mate Palin, "We will never put America in this position again. We will clean up Wall Street."

"We have a regulatory system in Washington today that was designed in the 1930s, and there's an alphabet soup of different agencies and they have to be streamlined, they have to be consolidated and they have to be effective," McCain said. "And those regulators have been asleep at the switch, and we've got to fix it."

McCain's campaign Web site contains no proposal outlining regulatory reform for Wall Street. However, in an e-mail, McCain campaign officials provided a broad outline of McCain's plan, which includes strengthening disclosure in the lending process so borrowers know exactly what they are getting into and complete disclosure of all cash and non-cash compensation of corporate CEOs.

Obama, for his part, proposed a six-point plan in March to reform the regulatory system, and it's on his campaign Web site. His plan includes:

• Giving the Federal Reserve basic supervisory authority over all institutions to which it might later be asked to extend credit.

• Strengthening capital and disclosure requirements of financial institutions and management of liquidity risk, and more investigation of rating agencies.

• Creating a financial market oversight commission to anticipate crises and report to the government.

• Streamlining competing regulatory agencies.

McCain told the Florida crowd that he, not Obama, is better able to achieve change on Wall Street because he has a record of taking on entrenched interests and Obama doesn't.

Both have also proposed tax cuts, although in general McCain's tax cuts "would primarily benefit those with very high incomes," while Obama "offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers," according to an analysis by the nonpartisan Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

While presidents — and candidates of the party occupying the White House — often take credit for good economies and try to avoid blame for bad ones, financial crises nearly always have multiple causes.

It's been nearly a decade since Congress and President Clinton reshaped the financial landscape. That 1999 legislation removed Depression-era barriers between commercial banks and investment firms and allowed the creation of financial behemoths where years later the risks of underwriting subprime mortgages were somewhat hidden.

Former Sen. Phil Gramm, R-Texas, until recently one of the McCain campaign's top economic advisers, was a chief writer of that law.

McCain voted for a Senate version of the bill but did not vote on the final package. Biden voted against the Senate legislation but for the final compromise that Clinton signed. Obama was not in Congress at the time.

Home loans became more affordable a few years ago when the Federal Reserve kept interest rates low. But lightly regulated financial outfits began slicing and dicing the resulting mortgages into securities and selling them to investors. Eventually, it all began collapsing, prices dropped, people started losing their homes and Wall Street went into a spin.

Democratic pollster Stan Greenberg predicted in a telephone interview that the economy "will soar as a voting issue" because of the huge shocks that have hit Wall Street. "It will force the discussion to a very serious thing — not that Palin is frivolous — but I think now people want to know where McCain and Obama are going to take the country."

Howard Wolfson, who was communications director for Sen. Hillary Rodham Clinton's Democratic primary campaign, described the financial meltdown as a "3 a.m. moment" for Wall Street.

"Will either candidate offer an explanation of the problem and a plan to fix it that will reassure voters and break through the din?" he asked.

After all the uproar and chatter of the past two weeks, the campaign may be heading back to fundamentals.

Compiled from McClatchy Newspapers, The Associated Press, Cox News Service and The Washington Post