It's Judgment Day for McCain

Wall Street Journal

Last week, Republican presidential candidate John McCain called for a commission to "find out what went wrong" on Wall Street. It was an excellent suggestion: Public inquiries into Wall Street practices served the country well in the 1930s.

And Mr. McCain has a special advantage to bring to any such investigation -- many of the relevant witnesses are friends or colleagues of his. In fact, he can probably get to the bottom of the whole mess just by cross-examining the people riding on his campaign bus. So the candidate should take a deep breath, remind himself that the country comes first, pull the Straight Talk Express over at a rest stop, whistle up his media pals, and begin.

Topic A should be deregulation. Financial institutions are dropping everywhere after playing with poorly regulated financial instruments; the last investment banks standing are begging the government for stricter oversight; and some of our nation's leading champions of laissez faire have ditched that theory in an extraordinary attempt to rescue the collapsing industry.

The philosophy of government that has dominated Washington for almost three decades is now in ruins, and it is up to Mr. McCain to find out exactly why we believed it in the first place. Why did government stand back and permit all the misconduct that generated all this bad debt? What particular ideas led us to believe that government should just keep its hands off and let markets run their course?

Maybe the McCain Commission on Deregulation can kick off with a statement from the candidate himself. It will be helpful for the public, if painful for the senator himself, to hear about Mr. McCain's own close brush with one of the towering figures of financial deregulation, Charles Keating, the master of Lincoln Savings and Loan. Keating had a special, urgent interest in getting Big Brother off our backs: in 1986 some meddlesome agency suspected him of massive violations of S&L regulations. Keating fought back by recruiting a handful of legislators, including Mr. McCain, to pressure S&L regulators to leave his S&L alone. A few years later, Lincoln became one of the largest financial failures in U.S. history.

After that, Mr. McCain can get on to witness No. 1: Phil Gramm, a former adviser to the candidate on economic issues and for many years the heavyweight champion of financial deregulation. It was this very fellow who, as a senator, co-authored the Financial Services Modernization Act, largely trashing the old financial regulatory structure and allowed banks, insurance companies and investment houses to merge into what Mr. Gramm called "a supermarket for financial services" -- supermarkets whose lousy decisions are now the wonder of the world and whose losses we will be underwriting for years to come.

The public will be intrigued to hear that Mr. Gramm, who eventually became an executive at UBS, a bank known for its subprime profligacy, also regarded uncompensated environmental regulation as "nothing less than robbery." They will want to know if he would now apply the same term to the activities of the industry on whose behalf he has labored for so many years.

If Mr. Gramm's wife Wendy happens to be on the bus, Mr. McCain might want to sort out some of the controversies that have followed her own career as a deregulator. For several years Mrs. Gramm headed the Commodity Futures Trading Commission, where her tenure is best remembered by a decision to allow certain kinds of energy trades to go unregulated. A company called Enron turned out to be the greatest beneficiary of the decision -- there isn't space here to recall the statesmanlike things they did with their newfound freedom -- and they appointed Wendy Gramm to their board of directors just weeks after she stepped down from her government job.

Later Mrs. Gramm went to the Mercatus Center in suburban Virginia, a thundering fortress of deregulatory theory. And here we glimpse another promising avenue of any investigation of the laissez-faire faith: the market ideology industry in Washington. Any proper assessment of this industry would also include the Competitive Enterprise Institute, the Cato Institute, the Heritage Foundation, FreedomWorks, the American Enterprise Institute, and the minor stars in the libertarian firmament, including my favorite, Bureaucrash, where punk rock meets the gold standard.

There are others. Mr. McCain could call Kevin Hassett, one of his senior economic advisers, who declared back in March in the Bangkok Post that the blame for the current crisis could be laid at the feet of "out-of-control government regulation," mainly in the form of municipal smart-growth initiatives. (That's right: The man whispering in the candidate's ear seemed to once believe that not-in-my-backyard suburbanites caused the worst financial collapse since 1929.)

But maybe it would be best simply to agree that financial regulation really is in the country's interest. As Mr. McCain's hero Theodore Roosevelt said 98 years ago, "every man holds his property subject to the general right of the community to regulate its use to whatever degree the public welfare may require it."