JIM LEHRER: Next, how candidates McCain, Clinton and Obama view the president’s plan to overhaul financial regulations. Judy Woodruff has that story.
JUDY WOODRUFF: The Bush administration’s proposal for overhauling the nation’s financial regulatory agencies has garnered mixed reviews from Wall Street, Capitol Hill, and from the presidential campaign trail.
The plan gives the Federal Reserve greater oversight of market stability; merges several bank-supervising agencies into one; and creates a third regulator to protect consumers and investors.
But with time running out on the Bush administration, the task of reforming the regulatory system likely will fall to the next president.
For the views of those vying to be the next president, we turn to economic advisers from each campaign.
Gene Sperling was national economic adviser for President Bill Clinton, and he now advises Hillary Clinton.
Georgetown Law Professor Daniel Tarullo also served as an adviser to President Clinton, but now advises Barack Obama.
And former Congressional Budget Director Doug Holtz-Eakin now advises John McCain.
Gentlemen, thank you all three for being with us. Let’s start with a broad look at what the treasury secretary of the Bush administration essentially laid out yesterday.
First of all, let me turn to you, Dan Tarullo. What does Barack Obama, your candidate, think in broad terms about this proposal?
DANIEL TARULLO, Adviser, Barack Obama: Well, first and most importantly, he feels that the priority for the country needs to be dealing with the current housing crisis, the current freeze in the credit markets. And that is where he would put his emphasis, and regrettably the administration has yet to address that issue.
With respect to Secretary Paulson’s plan, however, Senator Obama, as he indicated in his speech last week in New York, does believe that the country needs significant financial reform.
Our regulatory system has let us down. We’ve had multiple opportunities in the last 10 or 15 years to take account of the new forms of financial activity. We haven’t done so. And so he is glad that there is a debate started.
Having said that, he feels that there are some real shortcomings in the plan.
JUDY WOODRUFF: Well, we’ll talk about those in just a minute.
Let me turn to you, Gene Sperling, representing the Hillary Clinton campaign. What is her sense of this broad plan?
GENE SPERLING, Adviser, Hillary Clinton: I think her sense is that she thinks it’s positive that Secretary Paulson is at least starting this conversation. She certainly doesn’t agree with everything that’s in the plan, but I think what her problem is, is that the administration just does not seem to appreciate that we need immediate action for an immediate crisis.
So I think the analogy that’s been used by others, which is I think correct, which is it’s a little bit like you’re in the middle of a natural disaster, you’ve got people stranded, there’s been no real plan by the administration, and somebody comes up with a long-term plan to restructure FEMA.
It’s an important discussion to have, but it’s an odd discussion to put the focus on when you still haven’t had the immediate action that’s needed to kind of stabilize the housing market.
JUDY WOODRUFF: All right, Douglas Holtz-Eakin, what does John McCain think of this?
DOUG HOLTZ-EAKIN, Adviser, John McCain: Well, this may be one of those rare moments of bipartisan unity on this issue, in that there’s a clear and pressing need to deal with the mortgage crisis. And I’m sure we’ll come back to that.
The senator thinks it’s important to overhaul our financial system. We have a patchwork that’s been built up over 70 years of regulators which in some cases duplicate each other, in some cases miss areas entirely.
He welcomes the plan as the beginning of a discussion, but I don’t think anyone would pretend this is the end point or something that would pass the Congress.
Obama, Clinton agree on basics
JUDY WOODRUFF: Well, I know you're all saying that the focus should have been on housing, but let's address a couple of questions about what the treasury secretary laid out.
Dan Tarullo, first of all, does this give the Federal Reserve the authority that it needs to regulate the financial system? I know there's some debate about how much more authority there is, but what does Senator Obama think?
DANIEL TARULLO: Well, Senator Obama's principal reaction to the plan is that it provides authority over the systemically important firms and investment banks and the like only when they begin to pose a threat, a clear and present threat to the financial system.
His view is any firm that could have access to the Fed's discount window -- that is to say, that could get taxpayer-backed money -- ought to be regulated on an ongoing basis, and that's not in the Paulson plan.
JUDY WOODRUFF: Gene Sperling, what about on that point?
GENE SPERLING: Well, I think Senator Clinton's attitude even to the larger issues also is related to what can be done immediately. So, for example, she believes that, on one hand, we should probably give the Fed maybe more temporary authority so that they can actually take more action right now while we're in the crisis.
On the other hand, there is a degree that this is just, you know, as they say, moving the deck chairs around. Some of the longer discussion about whether the SEC or the Federal Reserve should take over certain actions, those are things we can take longer to take time for.But when you look at what they're talking about here, it's still kind of a SWAT-team approach. That's the phrase they use. It is still designed more to react to the crisis than giving the right authority to help prevent crises going forward.
Many firms now 'too big to fail'
JUDY WOODRUFF: Doug Holtz-Eakin, on this question of the Federal Reserve getting more authority, what does the senator think?
DOUG HOLTZ-EAKIN: The senator doesn't believe there should be an ongoing need for investment banks to have access to the Fed and that they should be more accountable and transparent in their activities and that the shareholders of those banks bear the responsibility for the missteps that they may take in the future.
The Fed has broad authority to protect the financial system, but it doesn't need to be in the regular business of giving money to investment banks.
Regular banks are different. People's deposits are in there, life savings. They have deposit insurance. They should be regulated in a very different way. And we don't want to confuse the two.
DANIEL TARULLO: Can I jump in there, Judy? Because I think that is an important distinction. Senator Obama doesn't believe that we can now say, "Gee, we did this once with Bear Stearns, it will never happen again."
The fact is that some of the noncommercial bank institutions are just as important systemically now as the big commercial banks. And you cannot assume that this is not going to happen again in the future. If that is the case, you need to have at least commensurate, appropriate, ongoing regulation.
JUDY WOODRUFF: So that's a clear point of difference between Senator Obama and Senator McCain?
DOUG HOLTZ-EAKIN: Well...
JUDY WOODRUFF: And...
DOUG HOLTZ-EAKIN: ... not exactly. I think the question is: Where do you vest that?
I mean, the plan envisions a clear role for a prudential regulator to make sure that safety and soundness of individual institutions is appropriately regulated. And the plan laid out by Secretary Paulson is by no means the only way to do that.
There's a very different approach in England. There's going to be a long debate about this. I don't think the question is going to be, should there be regulation or not? The question is, what will be the effect of forming that regulation?
DANIEL TARULLO: No, but the question is going to be, are these large, noncommercial bank financial institutions going to be subject to that kind of regulation, to capital regulation, to liquidity regulation? They're not subject...
JUDY WOODRUFF: And you're saying they should be?
DANIEL TARULLO: Senator Obama is saying they should be.
GENE SPERLING: And I think what we've seen in a very visceral way here is, you know, there used to be the expression, Judy, that a banker or a financial institution was too big to fail. Well, the expression everybody is using now, which is appropriate, is that there are too many things that are too interconnected to fail.
And when you see people making the case for why you have to step in for a Bear Stearns or a JPMorgan, they're essentially, in doing so, making the case why you can't just take a SWAT-team approach, that there has to be some form of more ongoing supervision.
Who is exactly the right person and how you exactly structure that kind of -- that systemic risk stabilizer, that probably is an issue we need time for, which, again, shows why we should be focusing more on the action we could take even in these structural...
All say increased regulation needed
JUDY WOODRUFF: Right, well, just quickly, one other aspect, major aspect of what was proposed is this notion of consolidating other federal agencies that now are in the business of regulating commodities and securities. Differences between the Democrats, Obama and Clinton, and McCain on that?
DOUG HOLTZ-EAKIN: Well, Senator McCain understands that the future has to look different than the past. And the great fear -- and what you heard the moment this plan was announced or this model for regulation was announced -- was the particular special interest groups lining up to say, "No way. We're not changing."
That's the last thing America needs. We need effective regulation that serves the financial needs of American families. And to have these individual pockets stop the plan would be the worst possible outcome.
JUDY WOODRUFF: All right, all three of you started out by saying that the -- you would have preferred to see the administration start out by addressing the housing crisis. What specifically would Senator Obama have wanted the administration to be doing right now?
DANIEL TARULLO: Well, three things, a couple of which it now appears are beginning to move in the Senate, based on the news from this afternoon.
First and most importantly, for Senator Obama the priority not just for the housing market, but for the economy is to put a floor underneath the subprime market right now. And that's why he supports the Dodd-Frank bill, which would do just that, by allowing the FHA to guarantee mortgages at a lower value than they currently have...
JUDY WOODRUFF: Federal Housing Administration.
DANIEL TARULLO: ... so people can stay in their homes. Correct.
JUDY WOODRUFF: And what about Senator Clinton on that?
GENE SPERLING: Well, Senator Clinton, last March, when the Fed was still saying that the subprime issue was contained, so that this was a larger issue and has been calling for a longer time for stronger leadership in terms of a timeout.
Very specifically, she called in early January for a $30 billion emergency housing fund which could go to states and localities that are seeing particular neighborhoods spiraling down, being affected by blight.
And then where we agree with Senator Obama and Frank and Dodd is that we should be moving forward with this plan to try to use FHA guarantees and an auction to free up mortgages, try to get them restructured, keep people in their homes.
But what Senator Clinton is saying is, you have to have a back-up plan. And she's willing to say that, one way or another, this needs to work. And if it requires the FHA, the Federal Housing Administration, to temporarily take possession and restructure those homes, we've got to take action now, and she's willing to come forward with that back-up plan, as well.
JUDY WOODRUFF: Doug Holtz-Eakin, what about Senator McCain on this?
DOUG HOLTZ-EAKIN: Senator McCain's top priority in this area has been effective response to the crisis. And he's promised not to play politics with it; that means it will have to be bipartisan, so today's development is very good.
And he's always felt that we should follow principles that include helping people who deserve it and improving the long-run situation at the same time. And we're seeing progress toward that. There's already been a lot that's been done.
And he's looking forward to an effective response. It's more important than having a plan with your name on it.
Main priorities still differ
JUDY WOODRUFF: Very quickly, assuming whether it's Senator Obama, Senator Clinton or Senator McCain who takes office as president, what is the most urgent economic need, other than what we've talked about here in the last few minutes, in the mind of Senator Obama?
DANIEL TARULLO: Well, assuming that the housing market and the credit markets are stabilized when he takes office, I think for him the most urgent priority is relieving the squeeze on the middle class that has been building for a decade now.
And that means tax reductions that help 95 percent of the people in the country and investments in our country so that the good jobs of the future will be available to the middle class.
JUDY WOODRUFF: Senator Clinton?
GENE SPERLING: You know, I think she's willing to narrow it down to one top priority, which is getting health care for everyone, because it's a moral issue -- everybody should be covered -- two, it's a pocketbook, middle-class squeeze issue, as Dan mentioned.
It's also an economic anxiety issue, the number of Americans who feel that they could be one pink slip and one illness away from financial devastation. And, finally, it's a competitiveness issue. We're seeing that job location here is tougher because of the high costs of health care borne by our companies, as well.
JUDY WOODRUFF: And speaking for Senator McCain?
DOUG HOLTZ-EAKIN: Senator McCain's priority would be to allow Americans to reach their dreams. If you focus on that, you get to the right things: rapid economic growth, so people keep and get new jobs, education, lower costs for health care, international competitiveness.
It's the agenda that helps the American family, and he'll focus on it from day one.JUDY WOODRUFF: All right, the economy is a huge subject. We appreciate all three of you coming in to help us tackle it tonight. Gene Sperling, Doug Holtz-Eakin, Dan Tarullo, thank you very much.