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The Democratic debate's Wall Street fight left both Clinton and Sanders looking bad

Two things are true about Hillary Clinton on financial regulation:

  1. She has the most detailed, and arguably the strongest, financial regulation plan of the three Democratic candidates.
  2. Wall Street skeptics don't really trust her to implement said plan.

Understanding those two points helps make sense of a fairly confusing, but important, exchange at the second Democratic debate — an exchange in which both Hillary Clinton and Bernie Sanders played into their critics' hands.

Hillary Clinton: Wall Street supported me because 9/11

It began when moderator John Dickerson asked Hillary Clinton, "You have received money from Wall Street. How will you convince voters you will level the playing field when you're indebted to some of its biggest players?"

Clinton initially tried to talk about her financial regulation plan, but Sanders wouldn't let her escape the issue of donations.

"Let's not be naive about it," Sanders said. "Why, over her political career, has Wall Street been the major campaign contributor to Hillary Clinton? Now, maybe they're dumb and they don't know what they're going to get, but I don't think so."

In response, Clinton, unwisely, played the 9/11 card.

"I represented New York on 9/11 when we were attacked," she replied. "Where were we attacked? We were attacked in downtown Manhattan, where Wall Street is. I did spend a whole lot of time and effort helping them rebuild. That was good for New York. It was good for the economy, and it was a way to rebuke the terrorists who had attacked our country."

Clinton's answer was bizarre — she doesn't believe Wall Street has backed her many campaigns primarily because of 9/11, and it's borderline insulting that she thinks anyone else would believe it, either.

Clinton didn't trust the audience with the truth. Wall Street supported her candidacy because both she and her husband often backed legislation Wall Street supported, because Wall Street routinely tries to buy favor with prominent politicians of both parties, and because many on Wall Street are Democrats who supported Clinton for other reasons.

That doesn't mean Clinton always backed Wall Street's priorities, or even that Wall Street was unusually positive toward Clinton — the financial industry also funneled a massive amount of money to Barack Obama in 2008.

Why Paul Krugman backs Hillary Clinton on financial regulation

Clinton's answer was so absurd that it reappeared later in the debate. CBS put up a tweet where someone said, "I've never seen a candidate invoke 9/11 to justify millions of Wall Street donations until now."

Sanders saw his opportunity. "The major issue right now is whether or not we reestablish Glass-Steagall," he said, referring to the law that broke commercial and investment banks apart, and that Bill Clinton repealed.

But whether you support or oppose the repeal of Glass-Steagall, it's very hard to argue that its repeal was a major cause of the 2007 financial crisis or that its restoration is the most pressing financial reform issue now.

This speaks to Sanders's problem when it comes to Wall Street reform: His instincts on the issue thrill reformers — Wall Street's "business model is greed and fraud," he said — but his apparent familiarity with the details of the issue often leaves something to be desired.

This gave Clinton an opportunity to demonstrate her superior knowledge of financial regulation — and the serious endorsements her plan has racked up:

I will tell you who is on my side. Paul Krugman, the Nobel prize-winning economist who said my plan for what we should do to rein in Wall Street was more comprehensive and better. Paul Volcker, one of the leading lights of trying to rein in the excesses, has also said he does not support reinstating Glass-Steagall. This may seem like a bit of an arcane discussion. I have nothing against the passion that my two friends here have about reinstating Glass-Steagall. I just don't think it would get the job done. I'm all about making sure we actually get results for whatever we do.

The Krugman column here is worth quoting, because it nicely sums up the real argument the candidates are having:

Mrs. Clinton had the better case. Mr. Sanders has been focused on restoring Glass-Steagall, the rule that separated deposit-taking banks from riskier wheeling and dealing. And repealing Glass-Steagall was indeed a mistake. But it’s not what caused the financial crisis, which arose instead from "shadow banks" like Lehman Brothers, which don’t take deposits but can nonetheless wreak havoc when they fail. Mrs. Clinton has laid out a plan to rein in shadow banks; so far, Mr. Sanders hasn’t.

But is Mrs. Clinton’s promise to take a tough line on the financial industry credible? Or would she, once in the White House, return to the finance-friendly, deregulatory policies of the 1990s?

The real issue: trust

Bernie Sanders goes further than Clinton in his promise to break up the big banks, but many of the problems in 2007 weren't located in the big banks, or even in banks at all (AIG, for instance, was an insurance company).

That's why reformers appreciate Clinton's plan, which digs into the incredibly complex details of the financial system in its effort to find the pockets of risk and make sure they don't cause another catastrophe.

Clinton's problem is that many financial reformers don't trust her to implement that plan — they look at the donations she's taken from the financial industry, and the number of Wall Street veterans she's appointed to key roles, and they worry that her plan, for all its strengths, is a campaign document that will be ignored or watered down if she wins the presidency.

That was the critique Clinton was given a chance to answer when she was asked about the donations she's taken from the financial industry, and she whiffed it — playing the 9/11 card wasn't just a bad answer because it was a bad answer, it was a bad answer because it suggested Clinton doesn't have a good answer and because it was a wasted opportunity for her to assuage the left's deepest doubts about her candidacy.

The result was that Clinton exacerbated the real problem she has with the Elizabeth Warren wing of the Democratic Party, which is a problem of trust, not of policy specifics.