Oct. 8, 2008 -- The following is an excerpted transcript of ABC News' Charles Gibson's exclusive interview with Sen. Barack Obama on the second presidential debate, the economy and other issues important to voters, for "World News With Charles Gibson" in Indianapolis on Oct. 8, 2008.

GIBSON: Senator, we're undergoing a global market meltdown, and we -- the basic firmament on which our economy is based has undergone a seismic shock for the last few days and yet last night, you guys had a debate about spending and tax policy and earmarks that you could have had three months ago. That's frustrating to people.

OBAMA: It was. It was frustrating to me. Part of it's the format. Look, you've got two minutes to respond to a financial crisis. And so, you know, if we had had more time, I think we could have had a better debate about what's happening right now.

I do think that we don't have the regulatory infrastructure, either domestically or globally, to deal with global capital markets. We have a 20th century system, and we've got a 21st century market. So there are going to be a couple of things that we're going to have to do. First of all, I was glad to see that we finally had some coordination between what the United States was doing, European countries, other central banks were doing. Because of the way capital now flows, there's got to be better coordination.

Number two, I was glad to see that Secretary Bernanke has decided to -- or that Chairman Bernanke has decided to go ahead and try to boost up the commercial paper markets. The average person may not, you know, think about commercial paper as underpinning the economy, but if major companies can't get, you know, short-term loans to make payroll or buy inventory, then you could see bankruptcy of huge companies all across the country. So those are some sort-term measures, but long term, we're going to have to revamp how our regulatory system works and then we're going to have to get fundamentals of the economy in ways that we just haven't taken care of for the last eight years.

GIBSON: But we have to deal with the tools that we have now with this.

OBAMA: Right.

GIBSON: We've talked to a lot of people as we've traveled around the Midwest. One woman in Dayton said to me, if either one of these guys could tell me succinctly, simply, how they're going to get us out of this mess, that guy would win. It's still to be won. And she said neither has, and it seems as if neither can.

OBAMA: Well, I -- you know, let me tell you. I can give you a succinct summary of what I intend to do. And I think that it will get us out of trouble, but it's going to take some time. Number one, we've got to make sure that this rescue plan works the way it's supposed to work; which means strong oversight. It means that the secretary of the treasury is treating the taxpayer money that we're putting up like we are investors so that, you know, when we buy up assets, we're making sure that we're going to be in a position to sell them back later and get our money back, that we are thinking about homeowners not just about Wall Street banks in terms of needing help.

And then what we've got to do is to deal with a fundamental imbalance in our economy. Part of the problem here is that the average person has seen their wages and their incomes going down. And they were relying on the hope that their home prices would continually go up. So that was the asset that was going to help fund college, help fund retirement. And that was unrealistic. So we've got to go back to basics, which is if you're going to be able to send your kids to college or retire, you've got to be earning enough money to save. And that's why it's so important that we get people back to work. That's why it's so important that we develop an energy strategy that works. That's why we've got to fix our health care system because that's the real looming nightmare out there when it comes to our budget deficits and our national debt. And that's why we've got to have an education system that works.

So those four fundamentals, those are going to be the lynchpins of our long-term economic growth. In the short term, what we're going to have to do is make sure that our financial institutions are regulated sufficiently, that we don't end up seeing these enormous risks, huge mountains of debt that are used to speculate, essentially, at trillion dollar levels and that put the entire economy, not just domestically but globally, at risk.

GIBSON: Somebody else said to us where's the passion in these guys. Where's the anger? People that lost trillions of dollars in their stock accounts, in their pension plans, in their 401(k)s. You said out there at this rally fear and panic cannot pervade us.

OBAMA: Right.

GIBSON: And yet fear does right now. And people look to leaders to turn that around or to counter that.

OBAMA: Well, I think that, you know, one of the reasons that we are doing well right now in the campaign -- and we've still got four weeks, which is eternity in politics -- I think the people looked at my approach over the last three or four weeks during this economic crisis, which was consistent, which set out very clear principles from the first day, principles, by the way, that ended up being adopted by Secretary Paulson and were embedded in this rescue plan, that they saw I wasn't trying to play politics with the issue, that, you know, a measured, calm, steady response to the crisis but one that recognizes that it's outrageous we're in this position to begin with and that we've got to make sure that whatever we do is working for ordinary people.

I think that has all helped. I mean -- and, frankly, you know, Senator McCain ended up lurching from place to place on this issue. And that, I think, is not the kind of leadership that we're going to need if we're going to be able to guide the economy out of this perilous position.

GIBSON: You also said at this rally we need new direction, we need new leadership in Washington. What would you be doing right now that's any different than what the Bush Administration has done and is doing?

OBAMA: Well, I'll tell you what. I do think that the administration is hampered by the fact that people don't have a lot the confidence in the president. I mean, if you think about previous crises -- you know, FDR. There were a whole bunch of programs that he tried that didn't work. But what he was able to provide to people was a sense that somebody's in charge and we're going to get through this.

And -- and that is as important as anything. And the fact that, if you've seen President Bush come out of the Rose Garden for two minutes at a time and, you know, not give a clear sense of what is taking place, describing this -- describing this rescue package as -- seeing it described as a bailout where the average person still thinks that what's happening is $700 billion is going out the door, and we're never going to see it again, and it's going to a bunch of Wall Street types. You know...

GIBSON: That's puts you in a position -- that puts you in a position of essentially saying trust me. I'm a 47-year-old guy with one term in the Senate.

OBAMA: Yeah.

GIBSON: You got to put your faith in me.

OBAMA: Well, of course. Look, if I wasn't -- if I didn't have confidence in the ability to lead the country, I wouldn't be running for president. But it's not simply trust me. What I'm saying to the American people is trust in us. Trust in ourselves. Trust in our innovation, the talent of our workers. Trust in our ability to be pragmatic and think these problems through and solve them. I mean, the truth is that very rarely when we have a crisis like this do we just have a blueprint solution that pops out and everything runs smoothly. That's not how things work. One of the great gifts of America is we're practical people so we try things. If they don't work, then we try something else. And we fidget with this and we tinker with that. But we maintain confidence in our core institutions, our core values, and we remain confident in the American people. And that's the job of the president to organize the -- the best people out there to rally the country, to give them a sense of direction and vision and say, you know what, we're going to keep on trying a bunch of stuff until something works.

GIBSON: But we -- we passed the $700 billion rescue package. The market went down.

OBAMA: Right.

GIBSON: The Fed said we'll be the primary lenders to bank and to businesses.

OBAMA: Right.

GIBSON: Market tanked. We now have a worldwide rate cut to try to increase liquidity. The market is yawning at that today.

OBAMA: Right.

GIBSON: It almost -- and the credit markets remain frozen.

OBAMA: Right.

GIBSON: It almost seems as if rationality is out the window.

OBAMA: Well, look, in the same way that I think Greenspan, the former Fed chairman, talked about irrational exuberance, we now have irrational despair. You know, trust is broken down in our financial institutions. Banks are afraid to lend to each other. They're afraid to lend to companies that have great balance sheets and have done everything right.

And that's, again, why it's so important for the president to be able to restore a sense of confidence and to help change the mindset of -- of traders, the markets. Now, what makes it more complicated is we now have a global economy. And that's why it's going to be so important for the next president to show global leadership.

One of the things that I will do as president is to gather together the G-20. You know, we have this G-7 that is an organization of what used to be the biggest economies. But it doesn't include China. It doesn't include India. It doesn't include huge markets.

And what we need to do is gather them together and say, you know what, we need a set of institutions that can help coordinate interest rates, can help coordinate some of these other issues so that we don't have these global crises that spiral out of control and no single government ends up being able to stem the tide that's coming out.

GIBSON: One woman last night stood up and asked you at the debate why should we trust either one of you with our money.

OBAMA: Right.

GIBSON: Which was an interesting question. It bespoke a sort of lack of faith in any kind of institution, a systemic breakdown that is indicative of fear.

OBAMA: Right.

GIBSON: How do you counter that?

OBAMA: You know, you have to deliver. And so I'm not sure that you're going to be able to entirely counter that prior to the election. I think people are right to be cynical.

Look, we -- we just went through eight years in which the economy was growing. People were working hard, remember. American worker productivity had never been higher and yet people's wages and incomes had gone down. We have a half trillion dollar deficit, and we've added several trillion dollars to the national debt.

I think it's not surprising that people say, OK, I'm working maybe two jobs. I'm not seeing my kids enough. I haven't bought a new car or gone out to dinner in several years. And yet I still don't have anything to save. I still am seeing my paycheck buy less and less. I still can't heat my home in the winter the way I need to.

And so what we're going to have to do, I think, is to -- the next president is going to have to be straight with the American people and say, we've got some big challenges. It's not going to be easy. We're not going to dig ourselves out of this situation overnight. But if we make a series of smart steps, if we're willing to prioritize, if we're willing to stop doing things that we don't need to do and just focus on the things that we have to do in order to get this economy right -- and that includes making some tough budgets choices -- then I have no doubt that America's going to be strong once again.

But it's going to require that kind of honesty with the American people and the ability to inspire the American people to remind them of what is great about this country. And that's something that we haven't heard a lot over the last several years.

GIBSON: The kids at Bowling Green, I watched the debate with them last night.

OBAMA: Right.

GIBSON: And other kids that we talked to during the day. They said they're not talking about our issues.

OBAMA: Student loans.

GIBSON: Right. They're not -- they don't believe the money's going to be there to pay for their loans to get them through four years of college. And then on top of that, I said to them, well, if you don't have any faith in that, how many of you believe Social Security will be there when you get to be 65. Twenty-one kids, three held up their hand.

OBAMA: Yes.

GIBSON: That, again, is a -- is a great doubt of faith in the system.

OBAMA: Although here's what I'll say. I mean, first of all, we've been talking about student loans probably every day during course of this campaign. I mean, I've got a very specific plan to make sure that students are able to afford to go to college in exchange for community service or military service.

So we are going to make sure that every young person in America can go to college. They have a right to be worried about social security and Medicare because those entitlement program are going to be running out of money unless we make some fundamental changes. And those are going to be tough choices. You know, I have offered what I think is the best approach on Social Security, for example, which is raising the cap on the payroll tax, keeping the tax rate the same, but saying, you know, somebody like myself or Warren Buffet can afford to pay a little more in payroll tax to make sure the system is solvent.

Medicare is a whole different problem. I mean, that is a big nightmare. Our health care costs are escalating so quickly that we may not be able to do anything about it. But one thing I've got say, though, despite the expressions of concern and skepticism on the part of young people, I wouldn't be sitting here a month away from the election with a pretty good shot at getting elected president had it not been for the extraordinary idealism and hopefulness of young people.

We have seen an outpouring of involvement and passion on their part that I don't think we've seen in a generation. And that makes me optimistic.

GIBSON: Change the subject for a moment. John McCain has unloaded on you in the last 72, 96 hours as has Sarah Palin. McCain is saying, essentially, we don't know who Barack Obama is, where he came from. I'm an open book, he's not.

OBAMA: Right.

GIBSON: Were you surprised, A, that he didn't bring it up last night at the debate and use that line of attack? And, B, since you must have prepared for it, what were you going to say?

OBAMA: Well, I am surprised that, you know, we've been seeing some pretty over-the-top attacks coming out of the McCain campaign over the last several days that he wasn't willing to say it to my face.

But I guess we've got one last debate. So presumably, if he ends up feeling that -- that he needs to, he will raise it during the debate.

The notion that people don't know who I am is a little hard to swallow. I've been running for president for the last two years. I've campaigned in 49 states. Millions of people have heard me speak at length on every topic under the sun. I've been involved now in 25 debates, going on my 26th. And I've written two books which any -- everybody who reads them will say are about as honest a set of reflections by, at least, a politician as are out there.

So, you know, I think that, you know, Senator McCain's campaign has been focusing on me primarily because they don't want to focus on the economy. And they've said as much. I mean, you've had their spokespeople over the last couple of days say if we talk about the economic crisis, we lose.

I mean, you can't be much more blatant than that. They want to change the subject. And I understand it because the fact is that John McCain has subscribed, for the most part, to the same economic philosophy as George Bush, the same economic philosophy that has governed over the last eight years and has helped to get us in this mess.

GIBSON: And, finally, she's come at you, Sarah Palin has come at you because of the Bill Ayers connection.

OBAMA: Right.

GIBSON: Are you going to have to address that again? How are you going to explain it? Have you had a continuing connection with it? And why didn't you just cut it off once and for all once when you knew?

OBAMA: Why don't we just clear it up right now. I'll repeat again what I've said many times. This is a guy who engaged in some despicable acts 40 years ago when I was eight years old. By the time I met him, 10 or 15 years ago, he was a college professor of education at the University of Illinois. And we served on a school reform board together, by the way, that was funded by Walter Annenberg, who had been an ambassador and close friend of Ronald Reagan. And so I have talked to him about school reform issues.

And the notion that somehow he has been involved in my campaign, that he is an adviser of mine, that he -- I've palled around with a terrorist, all these statements are made simply to try to score cheap political points. And, you know, the idea that the McCain campaign would want to make this the centerpiece of the discussion in the closing weeks of a campaign where we are facing the worst economic crisis since the Great Depression and we're in the middle of two wars, I think makes very little sense not just to me but to the American people.

And if, you know, look, I can handle these attacks for the remaining four weeks, but it's certainly not serving our democracy right now. We need to be having a debate about how we're going to yank ourselves out of a very difficult situation. And that's what I'm going to spend my time talking about.

GIBSON: Senator, thanks.

OBAMA: Thank you, so much.

GIBSON: Appreciate talking to you.

OBAMA: Thank you.