While Obama has previously been relatively restrained when addressing Trump, the former commander-in-chief questioned the president's much-touted economic success, his agenda at large and his failure to offer a full-throated condemnation of white supremacists.
"He's just capitalizing on resentments that politicians have been fanning for years", Trump said.
"It did not start with Donald Trump", Obama said.
"We're in a challenging moment because, when you look at the arc of American history, there's always been a push and pull between those who want to go forward and those who want to look back, between those who want to divide and those are seeking to bring people together, between those who promote the politics of hope and those who exploit the politics of fear", he said.
Obama also unloaded on the Republican Party, saying that it has become a home for the politics of "division, of resentment and paranoia" and that its members are abdicating their responsibilities by doing nothing "when the president does something insane".
Obama's Friday speech kicked off his move back into the political fray - the former president is planning campaign events with candidates in California, Ohio, Pennsylvania, and IL this month, as this year's midterm elections heat up.
"When you hear how great the economy's doing right now, let's just remember when this recovery started", he said, recalling that he had inherited a unsafe economic downturn and left office amid a recovery.
Former President Barack Obama speaks to students at the University of Illinois where he accepted the Paul H. Douglas Award for Ethics in Government on September 7, 2018 in Urbana, Illinois.
Obama said the USA needs to restore "honesty and decency" in government.
He said stakes were high not just for Democrats but for all Americans, as "people feel scared" about a litany of issues: a troubled health care system, the high costs of education, a warming climate and more. "The consequences of any of us sitting on the sidelines are more dire".
The comments drew a rebuke from Trump who told his own rally in Fargo, North Dakota, "Obama was trying to take credit for this incredible thing that's happening".
He later added: "This is not normal".
"I'm sorry, I watched it but I fell asleep", Trump said. "I found he's very good - very good for sleeping", he said.
"It is us not doing what we're supposed to do", he said.
"I have to say this to President Obama: if the Dems got in with their agenda in November of nearly 2 years ago, instead of having 4.2 up, i believe honestly we'd have 4.2 down", Trump said, referring to the U.S.'s economic growth. "How hard can that be, saying that Nazis are bad?"
On Saturday, the former president will stump for House Democratic candidates from California at an event in Orange County, a conservative-leaning part of California where Republicans are at risk of losing several congressional seats.
Obama is expected to deliver a similar message in Cleveland on Thursday, when he campaigns on behalf of Richard Cordray, the Democratic nominee for OH governor, and other Democrats.
Next week, Obama plans to campaign in Ohio for Richard Cordray, the Democratic nominee for governor, and Ohio Democrats.
Obama's campaign activity will continue through October and will include fundraising appearances, according to an adviser.
Analysts say Obama's star status among Democrats will help drive turnout among African-American, Latino and young voters in key suburban House districts and cities.
Pence said it's "very disappointing" to see Obama break with the tradition of former presidents, who largely shun the campaign trail, and "become so political".