Campaign deja vu: It's the economy again

WASHINGTON -- Democratic presidential candidate Barack Obama has struggled all year to connect with voters on the economy, and this week into his lap dropped a Wall Street meltdown of historic proportions.

Obama's response was a detailed speech in Colorado Tuesday, where he lashed out at the Bush administration and repackaged his six principles that would guide a regulatory overhaul of the financial system, from strengthening capital requirements to regulating mortgage brokers.

"This is what happens when you confuse the free market with a free license to let special interests take whatever they can get, however they can get it," Obama said. He again called the crisis "nothing less than the final verdict on an economic philosophy that has completely failed."

Republican candidate John McCain responded in Florida with a highly charged populist message, promising to "put an end to the reckless conduct, corruption and unbridled greed" that he said caused the crisis on Wall Street. He also swiveled from his earlier resistance to greater regulation. "Under my reforms," he said, "the American people will be protected by comprehensive regulations that will apply the rules and enforce them to the full."

The rolling collapse of major financial institutions offers voters a clear showcase for how both men might handle the complex crisis that is rocking the foundations of the U.S. economy.

Yet so far the "the positioning is very predictable," said Barry Eichengreen, a University of California Berkeley economist and expert on financial crises. "Obama's asserting that the Bush administration caused it, and McCain is asserting that someone else caused it, in this case irresponsible and corrupt markets."

Eichengreen said the candidates' Web sites were focusing on oil prices -- even though they had dropped 30 percent since their peak. "Only now are they discovering the existence of financial problems," he said. "I don't think either side has really adequately done its homework in terms of indicating what exactly they would do."

Little in either McCain's or Obama's backgrounds suggests keen interest in economic affairs. McCain was a naval officer, and although he chaired the Senate Commerce Committee, his chief interest is foreign affairs. Obama is a lawyer by training and has not had much exposure to economics or finance.

Obama's economic message relies heavily on blaming the Bush administration for the current mess. Yet voters might not be comfortable with Obama's credentials to set things right, said Si Sheppard, a political scientist at Boston University. "People turn that around and ask what credentials do you bring to the table," he said. "Obama raises the alternatives, but the question is, he's never actually implemented anything."

McCain, for his part, has admitted he is no economics expert and is "trying to thread the needle of the candidate of experience and the candidate of reform," Sheppard said. "The irony is when people are experiencing uncertain times, they tend to value experience."

The troubles on Wall Street have been evident for more than a year. So far, the bursting of the housing bubble has toppled three of Wall Street's five big investment banks and quasi-private mortgage giants Fannie Mae and Freddie Mac and a huge insurer, AIG. The result will be a further credit tightening that squeezes the economy.

While some economists blame the Bush administration for lax oversight and overconfidence in market self-correction, Democrats had a hand in the mess too. The chairs of the Senate Banking Committee, Chris Dodd, and House Financial Services Committee, Barney Frank, have been among the staunchest defenders of Fannie Mae and Freddie Mac, said University of California Davis economist Steven Sheffrin.

"Everyone was in this game," he said. "The Bush administration was very pleased when the home ownership rate went up, and the Democrats in Congress were pushing for more home ownership. This really was a bipartisan thing."

With both candidates embracing more regulation, the question may boil down to the fervor with which they pursue it, the care they take not to make mistakes, and the role of Congress, which is all but certain to be controlled by Democrats. Experts speculated that either an Obama or McCain administration would probably be pulled further left than their current positions by pro-regulation Democrats on Capitol Hill.

More financial regulation is necessary, many economists agreed, but some warned against going back to the heavy regulation of the 1970s that made it difficult for any but those with a lot of cash and a long credit history to get a mortgage.

(E-mail Carolyn Lochhead at clochhead(at)sfchronicle.com)

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)