Interview with John Harwood of The New York Times and CNBC

HARWOOD: Senator, thanks so much for joining us.

OBAMA: Thank you.

HARWOOD: You've been briefed on this plan the Treasury is putting forward, working out with Congress. How confident are you that this is going to work?

OBAMA: Well, I don't think it's completely a plan yet. What we have is a request, a massive amount of money that the Treasury would have discretion over, and we know that it's going to potentially take a while to work this thing out. We haven't seen all the details. But we have to remember, first of all, how we got here. We had years of regulators looking the other way. We had, I believe, a economic theory that's failed, that says anything goes at the top and we're not going to worry about what's happening on Main Street. Regardless of how we got there, we now have a situation where people's jobs, people's savings, people's retirement accounts, their job security, all that is at risk. And so we've got to take some firm and decisive steps. I think that it has to be bold, and I am supportive of the need for quick action, but there's some principles that I think have to be included.

Number one, I think we have to have oversight. I don't think it can be a blank check. We can set up a system where there's an independent overseer, maybe the chairman of the Federal Reserve Bank and the Democrats and the Republicans each appoint somebody to oversee the system. But we have to make sure that this is--there's some accountability mechanism in it.

A second principle that we have to have is that the taxpayers have to share in the upside of this process. If we are buying up assets and are eventually selling them, we want to make sure that it's structured in a way that taxpayers aren't left holding the bag and it ends up costing a lot more than it should.

Third principle is that we've got to have relief for the homeowners. The underlying problem in this whole situation is that home values are declining, foreclosures are going haywire. We've got to make sure that we're addressing that underlying problem and that relief flows to homeowners and it's not just a bailout for Wall Street.

And the fourth principle that I think is important is that as we increase liquidity in the system as we restore market confidence; that we're also making sure that CEOs and executives, large investors, that they are not walking away with billions of dollars in profits or added value. I think there's got to be some constraints on what they benefit in terms of making sure that the program works and the taxpayers aren't paying for multimillion dollar bonuses.

HARWOOD: It looks as if there's the bipartisan will to move this through quickly in Congress, and if that happens then the government will have just taken on $700 billion of obligations that you haven't planned on throughout your two-year campaign for president. So how do you adjust your agenda in light of that, whether it's the scale of your plans for spending on health care, energy or other issues, whether it's on the advisability of raising taxes on capital gains and dividends, even staffing your administration? Would you ask Hank Paulson, for example, to stay on as Treasury secretary?

OBAMA: Well, I'll take the last question first. I think that the transition from the current administration to the next one is going to be something we've got to pay a lot of attention to; not just because of the financial crisis, but also because we're in the middle of two wars and we are still vulnerable to terrorist attacks. So without saying specifically what we'll do, I think it's important to make sure that that transition is seamless and that we pass the baton effectively.

HARWOOD: Would you consider having Paulson stay on?

OBAMA: I would certainly want to make sure that Paulson was involved in the transition. That doesn't necessarily mean that he'd end up being the secretary Treasury, but I think it's important for us to make sure that those who are currently in charge when it comes to the financial crisis and defense and intelligence, that they are deeply involved in the transition process.

When it comes to the issues of my long-term economic plan, look, here's what we've got. We've got a immediate crisis that has to be dealt with, and I think it's important for us to act in a bipartisan fashion, to act swiftly and decisively and not get too bogged down with a lot of partisan rankle. But what we have to remember is how we got into this problem in the first place. Contrary to what John McCain says, the fundamentals of the economy are not sound. The problem that we have in part has to do with wages and incomes that have been flat, and so homeowners and ordinary families out there have been working very hard but it's tough for them to pay the bills and stay afloat with rising gas prices and health care. So if we don't address our long-term competitiveness, if we don't address some of the inequities in the tax code, if we're not addressing some of the things that weakened the family budget, then we're not, over the long term, going to solve these larger problems in the financial markets.

HARWOOD: Does that mean you can do everything that you have been campaigning on and spend $700 billion on this bailout?

OBAMA: Here's what I think we have to do. I do think that we're going to have to change our tax code in the ways that I've described so that we are giving a middle-class tax cut. Ninety-five percent of families have more money in their pockets, that allows them to save more, pay down some of their credit card bills, deal with rising gas prices, deal with rising food prices. That has a stimulative effect that will help to create jobs, that'll help the small business owner, retail sales. I believe that that is very important. Now, I think it's important to pay for it, which means that it's time for us to close some of these tax havens and loopholes that haven't contributed to growth in the economy overall. In fact, what they've contributed to are outsized profits that have gone into some of these risky instruments that have ended up getting us into financial trouble.

HARWOOD: And what about on the spending side?

OBAMA: Well, on the spending side, I think it's going to be important for us to deal with the health care crisis and...

HARWOOD: So no change in your health care plan?

OBAMA: Well, the--but keep in mind, my health care plan is paid for. And I continue to believe that rolling back the Bush tax cuts on the wealthiest Americans makes sense. They are still going to be wealthy after those are rolled back. I still believe that it is important for us to make college more affordable. And I think it's important that all those things are paid for in light of this huge additional potential expense.

But one last point I want to make, though, on what Secretary Paulson is proposing. If this is done properly, then the expenditure should not be $700 billion. But that's why it's important to have oversight, that's why it's important the taxpayers participate in the upside, and we have to make sure that we have a overall strategy that is helping Main Street with the same sense of urgency as we're helping Wall Street. I don't want us to get bogged down over the next week in dealing with what is a severe crisis. We've got to unlock the credit markets, we've got to restore liquidity, we've got to help the banks recapitalize, but we can't simply do that and then go back to business as usual.

HARWOOD: Well, speaking of that, you can't legislate against bubbles. It--you can't legislate against risk taking on Wall Street. Hard to legislate against the sale of securities. What specifically could you do to prevent what's happened recently from happening again in the future?

OBAMA: Well, I disagree that you can't regulate some risk taking. Look, what--during the Great Depression we put in place regulations related to banks that said we're going to provide insurance so you don't have a bunch of people starting a run on your bank. But in exchange for that--we're going to look carefully at your books and we're going to make sure that you have certain capital requirements and other steps that make sure that you're acting responsibly in exchange for this insurance, this backstop that the federal government's provided. The problem that we have is that those 20th century regulations never adapted to a 21st century financial environment. So now the traditional bank accounts for only a small portion of the overall financial sector. I think it's going to be important for us to make sure that if we are a backstop, let's say on an investment bank, that that investment bank has certain capital requirements and other requirements to assure that they are not taking wild risks. What we don't want is a situation where they are able to say, "Heads, I win; tails, the taxpayer loses." And you know, this whole process of deregulation is one that I think could have been thought through.

John McCain has said that, you know, he is always a deregulator. That was his philosophy. Phil Gramm, one of his main economic advisers, took that same approach. The truth of the matter is that, you know, we have had an ideology that says regulation is always bad. And my argument is that smart regulations can in fact improve the marketplace because they improve transparency, they gives people a sense of if they're buying something, they know what is--what's in there. And you know, this is one of those situations where we can strengthen the marketplace, strengthen capitalism by making sure that the federal government has some oversight.

HARWOOD: What do you do about the part of the problem that's broader than Wall Street, that goes to the fact that our society has been consuming more than we've been producing, people have been spending more than they're earning on bigger houses, more gadgets. You don't get votes by telling people that they ought to downscale their expectations, but how do you deal with that part of the problem?

OBAMA: Well, I think what we can do is to make sure that people's incomes are rising. I actually think that, you know, this is--this is sort of a myth that's evolving, that the problem here is that, you know, the American people have been spendthrifts. Half of bankruptcies are occurring because people get sick and they don't have health insurance. A lot of the credit cards that people are racking up--the credit cards that people are racking up is because at the end of the month their expenses just don't match up with what they're bringing in, despite the fact that they may be working two, three jobs. Some--many people are--go deeply in debt because they've got to pay for their kids' college educations. So this is why it's so important that we understand that the fundamentals of the economy have been weakened. Wages and incomes have gone down $2,000 for the average family during George Bush. They went up $7500 under Bill Clinton. That's a big differential for somebody who's making 40, $50,000 a year. And it's not surprising, then, that our savings rates plummeted.

Look, people are going to make adjustments on their own. You know, most Americans I meet, they don't want to be in debt. They are embarrassed by the prospects of bankruptcy. You're already seeing in the transportation sector, people have changed their buying habits once gas got to a certain price. So I think consumers are naturally going to make some adjustments. But what we have to do is create--whether it's a sound energy policy that's focused on alternative energy and improved efficiency on cars, whether it's a health care system that's much more...(unintelligible)...and books as on prevention, whether it's making sure that college is affordable; if we're doing those things that helps get into the middle class and stay in the middle class, then we are going to be able to create a better cushion for them and they're going to be able to save more. That will be good for the overall health of the system.

HARWOOD: Let me ask a question about you that goes to risk and trust. When you saw the picture of those legislators in both parties with Ben Bernanke and Hank Paulson the other night, they looked frightened. They were looking at the potential for real--very severe economic dislocation, which would affect a lot of people's life savings.

OBAMA: Right.

HARWOOD: When you talk to voters, how do you convince them to trust you as a relatively inexperienced person on the national stage, that they can entrust this economy and their savings to you?

OBAMA: Well, a couple of things. I think if you--if you look this week, I was in constant communication with Hank Paulson, Ben Bernanke; my economic advisers which include Paul Volcker, the former Federal Reserve Board chairman; Bob Rubin, former Treasury secretary; Warren Buffet, who I think everybody feels knows the economy pretty well. And I think if you talk to those folks, they would say this guy knows what he's talking about and, most importantly, he knows how to put together a team of people that know what they're talking about and has the ability to bring them together to ask the right questions and find solutions. I don't think that the American people expect somebody to deal with this who is a economics PhD. What they do expect is that we have a president who is engaged, who understands the arguments involved, who understands the principles that have to be fought for. And that's what I bring to bear in this race.

HARWOOD: What do you think they've seen from John McCain?

OBAMA: Well, I--you know, look, I'll just--I'll let people draw their own conclusions. On Monday, John McCain said the economy was fundamentally sound. He then said that, well, what he really was talking about were American workers, which wasn't very persuasive. He was initially opposed to the AIG bailout, the next day he says that he's for the AIG bailout. He then calls for the firing of Chris Cox and starts sounding like a Huey Long populist.

HARWOOD: You don't support the firing of Chris Cox?

OBAMA: Well, the point is I actually do think that Chris Cox has not overseen the markets the way he could have, and he's a Republican appointee. But...

HARWOOD: But would you fire him in the middle of a crisis?

OBAMA: Well, what I would do is I would say let's get through this and then let's make an assessment. I think that what's important is to understand that John McCain's bill fails to recognize that it's the overarching economic theories that have been operating over the last eight years that need to be fired, that have failed. And you know, that is not something that you have seen acknowledged yet. They've--John McCain has historically said that we don't need regulation. In fact, he recently stated that he thought we should use the health care--we should adopt the same principles of deregulation to the health care system as we have to the banking system. You know, he's somebody who has been supportive of privatizing portions of Social Security. Imagine what would have happened if we had gone through with the Bush-McCain privatization scheme. You would have retirees right now seeing half, maybe two-thirds of their retirement accounts vanished. And so there is a--just a fundamental difference between John McCain and myself in terms of how we get this economy back on track.

HARWOOD: Last question. Given all that, as we head toward the first debate you're locked in a very close race, perhaps you're slightly ahead. But some people look at what's going on in the economy and other political circumstances and think you should be doing better. Some people say it's because you're aloof, some people say you're cerebral, John McCain says you're not ready to lead, some people think it may have something to do with your race. Why do you think, especially on the economy, you have not connected better than you have so far?

OBAMA: Well, you know, I have--I have to say that this notion that somehow it should be a cakewalk to win the presidency is--it's never happened in history, a nonincumbent--people wisely, I think, want to lift the hood and kick the tires, and they want to listen to the debates. And they're going to make up their minds relatively late. And that's been true throughout history. So we feel very confident about the kind of campaign we're running. I think the most important thing that I want voters to think about when they're going in to, you know, vote on November 4th, is can we afford eight more years of the same economic philosophy? And I don't think anybody disputes, despite the change slogan that John McCain's been trying to hoist lately--I don't think anybody disputes that John McCain, his basic economic orientation is the same as George Bush's. He's got the same tax plan, he's got the same health care plan, he's got the same privatization of Social Security plan, he's got the same absence of a plan when it comes to college education, and the--and he's got the same approach to regulation, or...

HARWOOD: Do you think race...

OBAMA: ...lack of regulation.

HARWOOD: Do you think race is a big barrier between you and swing voters?

OBAMA: Look, if you're asking me are there some people who might not vote for me because of my race? Of course. Are there some who might vote for me because of my race? You bet. I think ultimately, though, the question's going to be decided by a guy or a woman who is working hard every day trying to save enough to send their kid to college, trying to pay the bills. And the real question they're going to have is, you know, can this guy help me in my life? Can this person, regardless of what he looks like and what his name is, can he guide the economy in such a way that I have a better chance of achieving the American dream? And is this guy going to fight for me every day? And if people look at my background and they see who I've fought for throughout my career--yes, as a community organizer, then as a civil rights attorney, then as a state legislature--legislator and now as a United States senator and candidate for president--I think what they can feel confident about is not only do my plans focus on Main Street and how we give ordinary folks a fair shake, but my track record has--that's who I've been fighting for as well. And I think that's going to be something that people understand by the time they vote.

HARWOOD: Senator, thanks so much for joining us.

OBAMA: Thank you very much. Appreciate it.