LITTLE ROCK

THE FUNDAMENTALS of our economy are strong,” John McCain said as Wall Street went into white-knuckle panic over diving investor confidence. Does he believe that? It doesn’t really matter, because the Republican has outsourced his economic policy to the ideologues whose opposition to regulations brought the financial markets to their knees,

McCain’s former economic adviser is ex-Texas Sen. Phil Gramm. On Dec. 15, 2000, hours before Congress was to leave for Christmas recess, Gramm had a 262-page amendment slipped into the appropriations bill. It forbade federal agencies to regulate the financial derivatives that greased the skids for passing along risky mortgage-backed securities to investors.

And that, my friends, is why everything’s falling apart. That is why the taxpayers are now on the hook for the follies of Fannie Mae, Freddie Mac, Bear Stearns and now the insurance giant AIG to the tune of $85 billion.

On Monday, McCain issued a tough-talk statement that he was “glad” that the feds “have said no to using taxpayer money to bail out Lehman Brothers, a position I have spoken about throughout this campaign.” On Tuesday, the government did the daddy of all bailouts. It took over AIG, fearing its bankruptcy could set off a cataclysmic chain of events.

And do you know where the problems lay at AIG? They weren’t in its main insurance business. They were in its derivatives-trading unit.

Last February, Fortune Magazine called Gramm “McCain’s Econ Brain.” Gramm lost the official title of economic adviser for making an impolitic remark about this being “a nation of whiners.” But Gramm’s belief in letting speculators do as they please was never an issue. And even after he left the campaign, Gramm had been mentioned as a possible treasury secretary in a McCain administration.

Another Gramm contribution was the “Enron loophole” that prevented federal oversight of Enron’s electronic energy trading. Such favors proved very expensive to consumers but profitable to the Gramms. Enron CEO Ken Lay chaired Gramm’s 1992 re-election campaign, and his wife, Wendy Gramm, spent years on the Enron board, earning as much as $1.8 million, according to Public Citizen, a consumer advocate.

So McCain’s reassurances to the little people that he won’t let what’s happening to them happen again is rather unconvincing. McCain now talks about the need for more regulations, but he’s been highly stingy with the for-instances. He wants a commission to look into it.

(Too bad he didn’t name Mitt Romney as his running mate. A former venture capitalist, Romney knows something about Wall Street.)

The Bush economy was built on baloney. It was built on keeping interest rates low so that people could borrow lots of money to spend on real estate and at the mall. The resulting housing bubble left middle class people feeling prosperous, even as their earnings stagnated or fell.

The Democrats weren’t exactly tigers on containing the housing bubble, but they did try to put brakes on some of the lending outrages that are the root of the current crisis. For example, Barack Obama sponsored a bill that would have prevented lenders from pressing abusive loan terms onto unsophisticated, subprime borrowers. That went nowhere.

“I certainly don’t fault Senator McCain for these problems,” Obama said early in the crisis, “but I do fault the economic philosophy he subscribes to.”

Obama need not be so mild-mannered. McCain’s economic philosophy is McCain’s fault. He doesn’t know much about economics — and has admitted as much — so his philosophy became a simple-minded faith in the opinion of others. And look who he listens to.

Americans will be paying for this philosophy well into the 21st Century.

Froma Harrop is a member of The Journal’s editorial board and a syndicated columnist.