WHAT'S UP, DOC?

What a day on Wall Street! Though the fall in the Dow Jones Industrial Average was a significant drop - about 5% - in one day, it pales in comparison to what happened in October 1987. However, that drop in the Dow occurred one year before a crucial election to replace an outgoing, lame-duck president. This drop landed in the middle of an intense political campaign where the race, as best as we can tell, is neck and neck.

Until now, the McCain/Palin campaign has used lies, distortions and fabrications to pull even and lift McCain from the dead. Yet, by wrapping himself in the economic policies of the Bush Administration and promising to continue tax cuts for the wealthy, John McCain faces a deep problem. Will an economy in free fall on Wall Street take down Main Street and expose insurmountable rifts in the conservative coalition? Or, will cultural fears dominate and allow McCain/Palin to beat the odds and win the White House?

Casting himself as the maverick, McCain promises to clear out the Aegean stalls. Today he railed against a Wall Street mentality that has turned sound investing into high stakes gambling more appropriate to a Las Vegas casino than a New York brokerage. That the architects of such risky adventures still manage to walk away with millions of dollars - fair in terms of the contracts these CEOs held, unfair in terms of the damage they have wrought - is surely an outrage. John McCain agrees and promises to deal with these malacious millionaires. But how?

Obama took pains to lay the blame for the current mess on eight years of Republican misrule in the White House. He cited a failure to exercise proper oversight and promised to deliver a much better regulatory regime should he win the White House.

Neither candidate, though, addresses what may lie at the crux of the current woes on Wall Street. Despite Obama's desire to pin this problem exclusively to the Bush Administration, its roots lie in the Reagan Revolution proper. Unfettering the economy and allowing Wall Street to design ever more exotic financial instruments that few, if any, truly understand have made it impossible for regulation to ever be sufficiently proactive to ward off periodic bubbles and busts.

As independent observers have noted, the Clinton interregnum did not diverge one bit from this aspect of the Reagan Revolution. Indeed, many of the "regulatory lapses" trace their origins to the Clinton regime. It was during the Clinton Administration after Treasury Secretary Robert Rubin won out over Labor Secretary Robert Reich that commerical and investment banks were allowed to "run amok". Accounting firms gained notoreity by facilitating ever more arcane off-balance sheet reporting. The Enron debacle that occurred during late 2001 had its roots during the Clinton Administration.

During the Democratic primary season, it was refreshing that Obama managed to put together a grass-roots funding of his campaign that was independent of democratic leaning Wall Street financiers who had aligned themselves almost exclusively behind Hillary Clinton. Without kowtowing to a whining Wall Street, Obama has appeared to be much more sympathetic to auto executive pleas for help as long as any government money is used to re-tool the automotive industry, produce fuel-efficient cars and herald a new era of innovation in an important industry. For Obama, it seems as if bail-outs must have a purpose and serve the overall interests of the American economy and not just appear to reward campaign supporters.

Still, both campaigns should read the important opinion piece that appeared in yesterday's New York Times. Composed by Tyler Cowen, economic professor at George Mason University, the article argued that it was not a lack of regulations on the financial sector that wreaked havoc on Wall Street. Rather, it was the general ineffectiveness of myriad existing regulations that failed to rein in excess financial speculation and allowed mortgage backed securities to profilerate without requiring the necessary transparency that might allow investors to accurately assess risk and the necessary paperwork to support fictitious income claims for would be home buyers.

Pushed by Senator Phil Gramm, the removal of some of the protections of the 1933 Glass-Steagall Act in 1999 may have helped break down the barriers between bankers and brokers and allowed a resurgence of the American economy, but where was the replacement regime that should have emerged to monitor the new American financial sector? The Clinton Administration didn't push for one, and Senator Gramm didn't wish one. What was left was a hodge-podge of regulations that may or may not have been adequate to deal with a housing bubble, the subprime mortgage meltdown that morphed into a general mortgage crisis and has led to weakened financial institutions reeling under credit markets that have seized up as commercial banks seek to protect themselves.

An earlier bout of financial distress culminating in the Dot-com bubble and the collapse of Enron in 2001 did lead to some regulatory reform. Despite the initial and ongoing resistance to reform measures such as Sarbanes-Oaxley have helped bring an air of transparency to corporate accounting. But, Sarbanes-Oaxley was only one small step towards an overhaul of the entire post Depression regulatory regime.

Both Palin and McCain claim that as mavericks, it will be their task to come in and clean up Washington. How they are going to succeed is dubious at best, their protestations notwithstanding. How can you, Senator McCain, clean up Washington when you are going to bring back to Washington people such as Phil Gramm whose Congressional career and subsequent Wall Street career demonstrate that they were and still are part of the problem? How, Senator McCain, are you going to clean up Washington when you so closely identify your economic policies with those currently in charge of Washington? What gives?

Perhaps we should hope that Palin DOES ascend to the Oval Office so that she can bring more of her friends and associates from Wasilla, the people she went to school with who filled important and high-paying positions in the Palin government in Alaska. After all, these people certainly had nothing to do with the financial destruction currently savaging Wall Street. Alas, Sarah, Michael Brown, the quintessential amateur, had nothing to do with Katrina devastating New Orleans. He couldn't order Katrina to turn away from the Big Easy. In the aftermath to Katrina, Brownie didn't do such a "heckuva job", and Sarah Palin's amateur hour won't save Wall Street or Main Street either.

And then, there is Douglas Holtz-Eakin. Officially, Mr. Holtz-Eakin is the chief economic advisor to the McCain campaign. In interviews, he reveals an understanding of the current mess on Wall Street that is far more nuanced than anything either Mr. McCain or Ms. Palin have offered. Mr. Holtz-Eakin proclaims that Senator McCain wants a uniform regulatory regime that theoretically would regulate equal actions equally. In other words, if investment banks want to act like highly regulated commerical banks, then they too should be subject to similar rules and regulations. In addition, Holtz-Aiken sees the need for greater transparency in order to penetrate the fog of arcana that allowed Wall Street to slice and dice securities to the point that no one, not even the originating institutions, appeared to truly understand what it was they were offering the investing public. De-toxification of these "assets" is what is required and transparency certainly is one part of the problem.

What's not transparent, though, is how exactly Mr. Holtz-Eakin's views are reflected in the mind set of John McCain. In the past, McCain has acknowledged that he doesn't really understand the economy that well. In March, he admitted to the Wall Street Journal that he is fundamentally a deregulator. Certainly, he demonstrated this during the early 90s Savings and Loan scandal when McCain, as one of the five senators - Republican and Democrat - caught up in the Keating Five scandal, urged federal regulators to back off from pursuing Charles Keating, then head of Lincoln Savings and Loan.

Even more troubling are the views of Phil Gramm, McCain's campaign co-chair and likely Treasury Secretary in a McCain/Palin administration. In the summer, ex-Senator and UBS lobbyist Phil Gramm sought to place the American malaise squarely on the shoulders of whiners. It wasn't toxic assets cluttering up the balance sheets of mortgage brokers and investment banks that were poisoning the public's perceptions of an economy that was fundamentally sound. It was an imagined state of mind that saw the United States standing on the threshold of perhaps the greatest economic challenge since the Great Depression. Who needs clarity and transparency when it's all in the mind, ya know!

So where do the views of Douglas Holtz-Eakin fit in exactly? Is he mere window dressing? Is he the fig leaf covering up the naked continuation of Bush/Cheney non-regulation and diverting attention from Senator McCain's disdain for regulation? Is he but a lone wolf sounding the right chords, but lost in a sea of other advisors such as Senator Gramm who really don't see a problem either on Wall Street or Main Street? Or, is he just another hatchet man who conjures nonsense in order to inflate the importance of John McCain by touting the latter's supposed role in facilitating the invention of the Blackberry?

Maybe the upcoming debates will provide an opportunity to see which John McCain emerges. Will it be the economic illiterate who parrots the views of advisors such as Phil Gramm and wraps it in the language of Herbert Hoover? Or, will it be the reasonable sounding, fairness espousing, complexity acknowledging economic views of Holtz-Aiken? Which McCain is it anyway? Straight talk as espoused by Holtz-Aiken or pure bull a la Gramm?

If ever Obama had an opportunity to get this campaign back on track and debate the issues, now is the time. If John McCain wants to resurrect Herbert Hoover and proclaim the underlying strength of the American economy, then it's time for Obama to become a truly hard hitting candidate. Compelling McCain to come clean would go a long way towards clarifying the stakes in this election. Pointing out the dangers inherent in allowing Bank of America to bail out first Countrywide and now Merrill/Lynch might persuade Americans of the need for greater transparency and accountability in financial transactions and alert us to future danger in letting such financial behemoths arise without an adequate oversight regime in place.

Melding FDR and JFK and presenting the warm and highly personal campaign that produces the hope and trust necessary between voter and government in order to enact legislation and rules that establish greater transparency, accountability and regulatory innovation in an Obama/Biden administration may be necessary, but it doesn't seem sufficient. Slamming McCain on specifics and holding him accountable for his deregulatory ardor might just do the trick. Of course, we could just let Elmer Fudd continue to baffle and befuddle the masses by masking the morass with more mascara.

"Nyah, what's up, doc?"