Democratic rivals urge more fiscal oversight
Both Democratic presidential contenders yesterday campaigned for a bigger government role in stimulating and regulating the economy as a new report indicated economic growth had nearly stalled.
Speaking in New York, ground zero for the deepening credit crunch, Senator Barack Obama called for expanding the Federal Reserve's oversight of financial institutions and pumping another $30 billion into the economy to relieve homeowners facing foreclosure, jobless workers, and cash-strapped state and local governments.
Senator Hillary Clinton, stumping in Raleigh, N.C., proposed a fresh $12.5 billion to retrain unemployed workers, an overhaul of financial regulations, and her own $30 billion stimulus package.
Both assailed the presumptive Republican nominee, Senator John McCain, for not proposing any new economic or regulatory programs as families struggle, but McCain quickly ridiculed his Democratic rivals' plans as "a multibillion bailout for big banks and speculators."
Still, with the Commerce Department reporting yesterday that the gross domestic product rose an anemic 0.6 percent in the fourth quarter of 2007, fueling further fears of a painful recession this year, momentum was building for a stronger government hand in the economy.
While lawmakers in both parties have relaxed regulations in recent years, the Wall Street crisis spurred by a wave of risky subprime mortgage lending may have shifted the pendulum toward increased oversight, said economist Ross Gittell at the University of New Hampshire's Whittemore School of Business and Economics.
"This is something that resonates," Gittell said yesterday. "This really affects people in their pocketbooks and wallets."
Recent polls have indicated that the economy is one of the leading issues for voters, but no candidate was given a clear edge in handling it. A poll released yesterday by the Pew Research Center indicated that American perceptions of the economy have grown more negative, with only 11 percent rating the economy excellent or good, down from 17 percent last month and 26 percent in January.
The public's rising economic anxiety has presented an opportunity for Democrats, who eagerly pounced on it yesterday.
Obama declared that deregulation pushed by lobbyists and political contributions has led to a "winner-take-all, anything goes environment" that has cost the country its sense of shared prosperity.
"We let the special interests put their thumbs on the economic scales," the Illinois senator told an audience that included Mayor Michael Bloomberg of New York and former Federal Reserve board chairman Paul Volcker. "The result has been a distorted market that creates bubbles instead of steady, sustainable growth, a market that favors Wall Street over Main Street, but ends up hurting both."
Clinton stressed her ability to pass programs and her sympathy for families struggling to pay their mortgage or health and tuition bills.
"It's time for a president who is ready on day one to be the commander in chief of our economy," the New York senator said, reframing her leadership campaign theme. "Sometimes the phone rings at 3 a.m. in the White House, and it's an economic crisis."
The most recent crisis, however, was handled not by the White House, but by the Federal Reserve.
The central bank departed from its normal practice earlier this month and guaranteed a $30 billion loan to an investment bank,
Since then, lawmakers - including US Representative Barney Frank, Democrat of Massachusetts, and Bush's Treasury secretary, Henry Paulson - have joined the chorus calling for greater scrutiny of financial institutions and exotic financial instruments, such as mortgage-backed securities, at the heart of the financial crisis.
But many market watchers doubt sweeping new regulations will take shape in the last months of the Bush administration. If a Democrat is elected president in November, stiffer regulations are thought likely, though not everyone is confident the government can get it right.
"It's almost inevitable that we're going to have new financial regulations," said Josh Lerner, professor of investment banking at Harvard Business School. "But given the complexity of getting anything done in Washington, and all the vested interests, the question is how long will it take to come up with a new system of regulations that allow financial institutions to take risks while avoiding a meltdown."
McCain, in a speech on the economy Tuesday, said he would work to help homeowners faced with foreclosure, but emphasized that government should not bail out irresponsible home buyers or lenders.
Yesterday, as Democrats stepped up their attacks on McCain, his senior economic policy adviser, Doug Holtz-Eakin, stressed that the Arizona senator was as committed as his Democratic rivals to transparency and accountability on Wall Street and reforms that could prevent a new financial crisis.
Daniel Tarullo, economic adviser to Obama and a former White House economic adviser in the Clinton administration, said that under Obama's plan, investment firms that borrowed from the Fed's "discount window" would be subject to requirements, such as maintaining minimum levels of capital and cash on hand. "Obviously, there's going to be a larger role for the Federal Reserve board," Tarullo said.
Clinton, starting a six-day tour centered on the economy, focused on the fallout of the financial crisis on ordinary citizens fearful of losing their homes and jobs.
She called for training workers whose jobs are threatened by global competition as the economy worsens: "While we have been rightly focused on trying to help people who are out of work, there's been too little thought and effort to help people gain new skills while they still have their existing jobs."
Yesterday's report from the Commerce Department, which confirmed earlier projections that the economy was slowing in the fourth quarter, suggested the country could officially be in recession by midyear.
A recession is usually defined as two consecutive quarters of contraction in the gross domestic product, which measures the total output of goods and services.
"This is a significant slowdown," said Nigel Gault, chief US economist for Global Insight, a research firm in Waltham.
Gault said the clamor for tighter regulations was strong medicine with the potential "to gum up the works" if done hastily.
"You've got a trade-off," he said. "You could end up with a somewhat less dynamic and innovative economy, but it may be more stable."
Robert Weisman can be reached at weisman@globe.com.
