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HARWOOD: A lot of people look at the housing mess and say, what happened. When you think about it, is it principally a problem of speculators, or do you think that government may have played a role by elevating the goal of homeownership too broadly beyond the capacity of large numbers of people to handle it?

Sen. OBAMA: Well, I think that there were a combination of forces. Obviously, we've had very low interest rates for a long time, and rising, as a consequence, rising housing prices for a long time, which made people feel that housing prices can only go up and only--and never go down. And then that made everybody, consumers, lenders, all feel a little bit too complacent. We had a fundamental failure, though, in government regulation, and I think that was a real problem. We had a government that was not paying attention to loans that were being made on assets that were shaky. You know, you had mortgage lenders engaging in practices that were not sound but because they could immediately sell off those loans and bundle them, and you know, nobody was minding the store. The government should have, at a certain point, stepped in and said, `We've got to tighten up these lending standards or we're going to be building a house of cards.' And that sort of transparency and accountability in the marketplace, that's not anti-market, that's pro-market. One of the things that's always worked for us, it's been one of our competitive advantages, is people can trust that if they invest in our markets, that they know what they're getting. And in the housing market in this situation, that--our government didn't do its job.

HARWOOD: Speaking of regulation, some people have called for a broad rewrite of the way the financial system is regulated.

Sen. OBAMA: Right.

HARWOOD: Including a shift toward oversight by the Federal Reserve rather than the SEC, which some have criticized for not having been up to the job.

Sen. OBAMA: Right.

HARWOOD: Do you agree with that, and do you see a much larger role for the Fed in overseeing the financial system?

Sen. OBAMA: I'm not sure it's a larger role. I think that we have to be smarter. We've got a lot of agencies who were originally formed for--in one market environment. That market environment has changed entirely. We now have a global economic system. There are a lot of financial instruments that are falling through the cracks because nobody's sure who has jurisdiction. In some cases, it would probably be possible for us to shift from very strict rules to a more standards based system when it came to regulating certain financial instruments. In some situations, we need to increase disclosure and transparency.

So what I want to do is bring together experts in these fields and say, `What's going to work to make sure that people know what they're getting, that those who are investing in the marketplace can have confidence and for example, the rating agencies, which appear to have been engaging in some, at least potential conflicts of interest, particularly around the housing market, and let's figure out which agencies are best equipped, actually, to carry these out. And it may be that, you know, we consolidate some agencies, give them a clearer mandate. If we do that, then I think that we can continue to have the best financial markets in the world. But we have to understand, we've got some fierce competition. London has done some very smart things, and as a consequence, are encroaching on a lot of what has traditionally been the province of Wall Street.

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