Tanking Economy? How About Tanking McCain Campaign?

By SARAH N. LYNCH, Correspondent

Remember when the Twin Towers crumbled and President Bush sat there in a grade school classroom, engrossed in a copy of “My Pet Goat”? It didn’t instill much confidence that he could lead in a time of chaos.

Well, these past few weeks have been the equivalent of a financial 9/11, only this time, the companies on Wall Street did it to themselves. But this time around, the American people got the benefit of previewing how our presidential nominees might respond to such a gargantuan crisis.

So far, it appears McCain is batting zero for zero. And if Obama plays his hand right, he may just have a shot of drowning out the Palin-mania that has swept over conservatives across the country and win this election.

McCain has admitted before that economics are not his strong suit, which is problematic enough. He demonstrated that about two weeks ago when he called for the firing of Securities and Exchange Commission chairman Chris Cox, when in fact a president does not even have the power to fire an SEC chairman. He also made a huge gaffe by claiming the “fundamentals of the economy are strong” at a time when Wall Street’s largest banks were falling to their knees. He made matters worse later when he said he was referring to the American people, demonstrating that he doesn’t really know the definition of “fundamentals.”

If that seemed like a bad move, it only got worse when he pulled a John Kerry and “flip-flopped” his positions, both on the bailout of AIG and the dramatic change in his policy position, to suddenly call for more regulation of the financial industry.

But perhaps his biggest public relations nightmare may come from the people he has chosen to advise him on economic policy – one of the biggest bull’s-eyes on McCain’s back that Obama can shoot at if he wants to win this debate.

Most notably of course is Phil Gramm, a former senator and fellow “de-regulator.” He’s the one who made the big mistake of calling Americans a “nation of whiners” caught up in a mere “mental recession.”

Phil Gramm is the man behind much of the deregulation of the banking and over-the-counter derivatives industries. In particular comes to mind the Commodity Futures Modernization Act of 2000, a piece of legislation tucked into an appropriations bill that essentially carved much of the multitrillion dollar “swaps” industry outside the reach of any federal regulator.

That bill is perhaps most infamous for creating the “Enron loophole” that helped the company escape regulation. But it’s now becoming equally infamous for exempting many other types of derivatives including credit default swaps. Credit default swaps are essentially bond insurance that one company will issue for a premium to another company as protection in case a borrower can’t cough up the funds. These financial instruments are traded in secret, off regulated exchanges and outside the reach of the Securities and Exchange Commission or the Commodity Futures Trading Commission. Unlike regulated exchanges, they don’t have the backing of a centralized clearing house to protect companies from default.

Credit default swaps were behind the collapse of AIG, which issued these insurance-like instruments to protect against toxic mortgage-backed securities, but couldn’t pay up when many of those debts went bad. And now, the very man who de-regulated them could become the next treasury secretary if McCain has his way.

Yes, things didn’t seem like they could get worse for the McCain campaign on the economy in recent weeks as company after company continued to collapse. The possibilities for attack by the Obama campaign seemed endless.

And then, it did.

Catastrophes on Wall Street got worse, and Treasury Secretary Hank Paulson told Congressional leaders he needed them to give him the power to spend up to $700 billion to buy the illiquid assets that were poisoning Wall Street. He didn’t want the plan to have a shred of oversight, and both Democrats and Republicans cried foul.

In a very theatrical move, the former de-regulator announced he planned to suspend his campaign and flee to Washington where he hoped to help push through the passage of Henry Paulson’s unprecedented $700 billion bailout plan. He even threatened to boycott the debate for good measure.

But Murphy’s Law decided to follow him along for the ride.

He arrived right when a deal had been announced and sat in a meeting with President Bush where he offered few words. And then, after previously expressing cautious support for the plan, his own party turned sour and staged a coup.

Democrats pointed fingers at McCain, claiming he was to blame for the failure. He pushed back, telling reporters he was working the phones to get the plan back on track. (But he still showed up to the debate, and did not return to Capitol Hill).

After a long and tedious weekend, progress appeared to be made. Republican House leaders seemed more likely to support the plan. McCain’s chief Republican strategist Steve Schmidt even gave McCain credit on Meet the Press for saving the bailout by claiming he was critical to helping win more votes on the Republican side of the aisle.

Perhaps McCain was starting to turn things around. Maybe his connections to Phil Gramm would not seem so bad now. Perhaps suspending the campaign had done some good.

Then, the unthinkable happened. The bailout failed.

Its stunning defeat has made McCain appear the fool.

And the only person who could be more foolish than McCain right now is Obama, if he doesn’t take advantage of this opportunity to kill his opponent when he’s at his lowest point in this campaign.

Sarah N. Lynch can be reached at sarahnlynch@gmail.com.