Amid turmoil, McCain turns to regulation

Market intervention critic rapidly recasts stance

John McCain with General Motors workers yesterday in Lake Orion, Mich. McCain has called for a commission to study remedies for the financial upheaval. (Stephan Savoia/ Associated Press)

WASHINGTON - Responding to the turmoil on Wall Street, John McCain said flatly yesterday: "We need strong and effective regulation."

But throughout his two-decade Senate career, McCain has cast himself as an outspoken critic of government intervention in the markets, saying that he is "fundamentally a deregulator."

The dizzying series of bankruptcies, buyouts, and bailouts on Wall Street has prompted McCain to recast his outlook at a crucial moment in the presidential campaign. After saying Tuesday that he opposed any more government bailouts, he said yesterday that the government was "forced" to loan $85 billion to rescue insurance giant AIG because so many of its customers were affected. After saying Monday that the "fundamentals of the economy are strong," he seemed to backtrack by saying he was talking about the spirit of workers, not the rising rate of unemployment or the plunging stock market.

McCain's economic worldview could suddenly be a political liability. Since he has said he supports government intervention only in catastrophic times, he is open to criticism from liberals who see deregulation as the root of the problem and conservatives who see the taxpayer bailouts as rewarding reckless decisions. Fifty-three percent of voters surveyed said they were confident in McCain's ability to make the right decisions about the economy, according to a New York Times/CBS News poll released yesterday, while 60 percent are confident in Democratic presidential rival Barack Obama. The poll showed stark pessimism about the economy - nearly 80 percent rated conditions as negative and 6 in 10 said they are getting worse.

"After all the years of tearing down the regulations that govern financial institutions, it rings hollow to claim that he will build them back up," said Elizabeth Warren, professor of bankruptcy law at Harvard Law School. "This economy is the direct consequence of the deregulation that John McCain fought for day after day, year after year, since the mid-1980s."

In recent days, the financial problems have become so enormous that McCain has had to rapidly adjust his stance, particularly on regulation of the financial sector. McCain is calling for a commission to study remedies for the meltdown, which he blamed partly on lax regulation.

"These actions stem from failed regulation, reckless management, and a casino culture on Wall Street that has crippled one of the most important companies in America," McCain said in a statement yesterday. He said he wanted to protect those "who hold insurance policies, retirement plans and other accounts with AIG," but "not bail out the management and speculators who created this mess."

The crisis has also revived memories of a subject the McCain campaign hoped would be only a distant memory: McCain's involvement in the "Keating Five" scandal in the late 1980s. In the aftermath of that Senate ethics investigation - in which McCain was faulted for poor judgment by advocating for a major campaign contributor with savings and loan regulators - McCain said he understood the need for government oversight of financial institutions.

But William K. Black, who was one of the regulators who accused McCain of interfering, said yesterday that he does not believe McCain ever shed his anti-regulatory views. "He still has ideological blinders on," said Black, who later co-wrote a government report on the lessons learned from the scandal.

"He took no meaningful leadership role to try to deal with the recurring problems, and that is why the current crisis not only recurred but has intensified to the point where they have severely damaged the global economy," said Black, now an associate professor of economics and law at the University of Missouri-Kansas City's law school.

Another analyst said that McCain has waited too long to speak out on stabilizing the US economy. "He has been very slow to recognize the severity," said Desmond Lachman, former managing director and chief emerging market economic strategist at Salomon Smith Barney.

"I think it has only been the last two days that it has finally registered that this is a serious problem," said Lachman, who is now a resident fellow at the American Enterprise Institute, a conservative think tank.

But McCain's supporters see him as appropriately pragmatic.

His economic adviser, Douglas Holtz-Eakin, asked why the senator abruptly changed his view on the AIG bailout and the need for more regulation, responded: "This is an unprecedented once-in-a-100 years crisis for the financial markets."

In a telephone interview yesterday, he said McCain saw the bailout as "the lesser of two evils" and realized a failure to intervene would have a devastating effect on the economy.

Edward L. Hudgins, former director of regulatory studies at the Cato Institute, and the executive director of the Atlas Society, a Washington-based free-market think tank, called John McCain "someone who is not a man with firm ideological or economic principles. It is not that he is not passionate. It's that he doesn't have a rule that he could generally apply to any situation."

Obama, elected to the Senate less than four years ago, has a much shorter track record on the subject, but he has generally called for stronger regulation of the markets and has criticized both political parties for allowing oversight of Wall Street firms to become too lax.

Obama has seized upon the issue and criticized McCain's anti-regulatory history, saying yesterday that the bailout of AIG is a sign of the failure of "an economic philosophy that sees any regulation at all as unwise and unnecessary."

The Illinois Democrat scoffed at McCain's pledge this week to take on "the old-boy network and Washington corruption" that he blamed for the Wall Street meltdown, saying McCain has been in Congress for 26 years and has former lobbyists in top posts in his campaign.

"The old boys' network? In the McCain campaign, that's called a staff meeting," Obama said in Nevada.

In the past year, as he courted conservatives to win the GOP nomination, McCain has said, "I'm always for less regulation."

In 1999, McCain voted for a Senate version of a law that loosened barriers between banks and investment firms that dated to the Great Depression. Supporters said the law was needed so US financial institutions could compete globally; the law enabled the rapid growth of some of the Wall Street giants now either bankrupt, bought out, or in trouble. The law was sponsored by then-Senator Phil Gramm, a Republican and one of McCain's former principal economic advisers, and signed by then-President Bill Clinton, a Democrat.

Holtz-Eakin, asked about the 1999 law, said it updated the regulatory framework, but "it is obvious we didn't finish the job for the 21st century in that bill."

The McCain campaign said this week that he tried in several cases to pass legislation that could have helped prevent some of the problems of this year. In 2005, McCain warned that "if Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole."

In March, McCain gave a speech on the housing crisis and said "it is not the duty of government to bail out and reward those who act irresponsibly." He said that the government should only rescue the banking system if "the entire financial system and the economy" were at risk.

But in the wake of this week's events, McCain has shifted his language to blame "corporate greed" and lack of oversight - not those who borrowed beyond their means - for the crisis.