The following editorial first appeared in the San Jose Mercury News:
This November's election will indeed make history - or repeat it, if we're not careful. With faint rumblings of 1932, the issue facing the candidates is not how to get the nation out of the Great Depression but how to avoid another one.
The Federal Reserve acted quickly to head off signs of failure in the mortgage and credit markets. But more regulation of financial institutions and help for besieged homeowners is vital. Democrats Hillary Clinton and Barack Obama have pledged to provide it. Republican John McCain has not. The difference will be a defining issue.
McCain is sounding like a befuddled Herbert Hoover. The presumptive Republican candidate's laissez-faire approach to the subprime mortgage crisis relies on bankers to voluntarily renegotiate terms with homeowners, something they won't do unless pushed or given incentives. He would assemble accountants to review how real estate is evaluated - hardly a profile in courage.
McCain ignores the extent to which investment banks' recklessness jeopardized the economy. Last week, he called for no regulatory actions or congressional fixes.
"It is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," he said.
As a matter of principle, yes. But it is government's duty, through oversight, to catch a problem before it becomes a disaster. Because that didn't happen, the Federal Reserve pledged $30 billion to prevent the default of investment bank Bear Stearns and made the unprecedented commitment of up to $400 billion in loans to other investment firms.
Over the past decade, regulators looked the other way as investment banks and hedge funds created a shadow banking system, going off the books to trade exotic instruments, like indecipherable credit default swaps. Banks and investment firms repackaged risky mortgages as securities, keeping billions of dollars in potential liabilities off the radar of analysts and investors. When home values fell, there was a cascading effect.
McCain acts like this didn't happen. Government, he said, should get out of the way by "removing regulatory, accounting and tax impediments to raising capital." Government couldn't get more out of the way if it moved offshore.
Obama has been the most outspoken in blaming Wall Street for the credit crisis. He calls for reviving Depression-era regulatory authority that the Bush and Clinton administrations have weakened.
Treasury Secretary Henry Paulson on Monday proposed giving the Federal Reserve extensive oversight over all financial markets. But he will not call for additional regulations. Obama would go further, requiring oversight and minimum capital reserves.
"When the Fed steps in, it is providing lenders an insurance policy underwritten by the American taxpayer," he said. "In return, taxpayers have every right to expect that these institutions are not taking excessive risks."
Clinton and Obama fundamentally agree that some of the 2 million homeowners facing potential bankruptcy need help. Both favor proposals to insure refinancing for borrowers if lenders agree to re-value the loans. Clinton would provide $30 billion to help cities and states buy foreclosed properties and freeze foreclosures for 90 days.
There is danger whenever government rescues investors, large or small, for their mistakes. Legislation must be written to prevent bailing out speculators and others who understood the risks.
But there's no question the government must do more to limit the wave of foreclosures that could further depress the economy and unsettle the stock market. McCain's indifference would only guarantee more of the same.