LAMBRO: Reformist McCain tackles Wall Street

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John McCain turned into his fiery political hero Teddy Roosevelt by fiercely attacking the "reckless conduct, corruption and unbridled greed" that plunged Wall Street into a crisis.

While the Federal Reserve and the administration struggled to end the credit and housing illness that has infected the investment community and parts of the larger economy, Mr. McCain took on Teddy Roosevelt's mantle of reformer - promising to enact and enforce reforms "to make sure these outrages never happen again."

The top of the economy was broken, he said. Too many people on Wall Street had "forgotten or disregarded basic rules of sound finance." Derivatives, mortgage-backed securities and other foolish investments were sold to insurance companies, pension funds and banks to their detriment and that of their customers.

His speech in Tampa, Fla., dramatically encapsulated the economic debacle spawned by unscrupulous people who made a lot of money bundling and selling risky subprime mortgages as securities to investment houses that turned worthless as the housing bubble burst and the bottom fell out of the market.

It was a bravura performance that showed how the McCain campaign could adapt to fast-changing economic crisis that threatened to bring down his campaign and propel Barack Obama to the presidency.

But as the Arizonan shook his fist T.R.-style at Wall Street, promising to cleanse the investment industry, the administration's fourth business bailout triggered a firestorm of anger from free-market conservatives that struck a chord among the party's base.

The same Republicans who cheered the Bush administration's refusal to bail out Lehman Brothers, allowing the investment bank to go bankrupt, were attacking the White House for the $85 billion bailout of the American International Group.

The Fed had advanced the loan, with AIG assets as collateral, but the go-ahead came from the White House. After bailing out investment banker Bear Stearns, then mortgage giants Fannie Mae and Freddie Mac, the government's takeover of global insurer AIG went too far, conservative leaders said.

"You cannot nationalize every failing business in America," an angry Rep. Mike Pence of Indiana told me. "In a free-market society, you are free to either succeed or fail, and if government now becomes the safety net for every private enterprise too big to fail, we are going to end up with an economy that looks a lot more like France than like the United States," the conservative House leader said.

Former House Speaker Newt Gingrich didn't mince words, either. "You can't be for capitalism on the way up and socialism on the way down, and you can't be for a welfare state for the rich," Mr. Gingrich told me last week. "The entire policy from Fannie Mae to AIG is a disaster. We need to recognize that most of the American economy is healthy, but Washington and Wall Street are sick. The politicians here would like to change America to be more like Washington, but we need to change Washington to be like the rest of America," he said.

But not all conservatives were as critical of the bailouts. Many said AIG had insured so many companies, investment funds and others parties that, if it went under, it would pull down other enterprises on a global scale.

"AIG posed systemic risk [to the economy], but we are asking too much of the Fed," Columbia Business School economist Glenn Hubbard, former chairman of President Bush's Council of Economic Advisers, said in an e-mail.

The Treasury and the Fed "should not ignore systemic risk just to limit moral hazard," he wrote separately last week. "But all of this firefighting has left us with problems. Additional write-downs are coming. We cannot, and should not, try to protect every institution."

The truth is that AIG had too many tentacles into many crevices in our economy, "and we will never know what would have happened had it simply been allowed to fail," said Heritage Foundation economist J.D. Foster.

"This was a preventive move. The equity or financial markets generally are in a state of enormous stress. AIG is such an enormous player; there's a legitimate threat it could have had a tremendous contagion, spreading across credit markets and into the rest of the economy," he said.

We are in an unsettling period of American economic history where fear is the driving force in our financial markets, and exaggeration rules our politics and the news media. A Google news search showed the words "since the Great Depression" were used more than 4,500 times in just the last month. Economist Donald Luskin said that's "akin to equating a sore throat with stomach cancer."

Letting some businesses fail won't bring down a $14 trillion economy, but it will cleanse it of weak businesses, allowing more capital to flow to the stronger players.

Mr. McCain's tough talk on reforming a bureaucratic, outdated, ineffective regulatory system is just the right tone the Republicans need to strike in this hysterical, fear-ridden political environment. But the focus must be on restoring confidence in our financial markets, unlocking investment capital and boosting economic growth - something freshman Sen. Barack Obama doesn't understand at all. Meantime, the administration was at work over the weekend crafting an unprecedented bailout plan to effectively end this economic nightmare, with Democrats and Republicans promising cooperation to enact it into law as soon as possible. Stay tuned.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.