It's still the economy, stupid

While we were all focused on lipstick shades for candidates, pit bulls, and pigs, the economy was boiling just beneath the surface ready to reassert itself. Catastrophe in the Gulf bringing gas prices above $4 a gallon again and the downward spiral of Lehman Brothers have once again forced us to confront the economic issues that have been eating away at most American families.

Given other recent bailouts, the government's tough love for Lehman is coming as a shock:

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.

The crisis is spilling over into Merrill Lynch and AIG:

A sense of foreboding gripped Wall Street as top executives feared collateral damage from a Lehman liquidation. Attention was focused on Merrill Lynch, which boasts the largest force of retail brokers, and American International Group Inc., the insurance giant. Both firms have seen their stocks get hammered on worries that they needed capital.

"Monday will be a day of reckoning for the financial markets," said Carlos Mendez, senior managing director of ICP Capital, a boutique investment firm in New York. On Sunday, he said, "it was like a fire alarm went off and people ran in all directions."

The human toll is going to be staggering.

The future of about 25,000 employees at Lehman and an additional 60,000 at Merrill is up in the air. Lehman's work force already has shrunk by about 3,000 in the past year. If the firm essentially goes out of business, most of the remaining employees are likely to lose their jobs. That would deal another blow to New York City's economy, resulting in lower tax revenues on personal income, real-estate transactions and corporate income.

By the end of Sunday, there wasn't much discussion at the Tennessee news sites. But the national media are beginning to assess the impact on the presidential race. The early view is that the developments should give the advantage back to Obama-Biden, who have been struggling to wrest coverage away from the nation's obsession with Sarah Palin:

The stunning weekend developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. It likely will spur a much greater focus by presidential candidates — Republican John McCain and Democrat Barack Obama — and members of Congress on the need for stricter financial regulation.

Samuel Hayes, finance professor emeritus at Harvard Business School, said the Bush administration may get a lot of blame for the situation, which could benefit Obama.

"Just the psychological impact of this kind of failure is going to be significant," he said. "It will color people's feelings about their well-being and the integrity of the financial system."

Here's one sketch of how the campaigns might be adapting their message to cope with the emerging realities:

McCain aides say he plans to use the news to underscore the reform message that he began hammering at the Republican National Convention. “This is bad news for the country and yet another sign that we need to reform Wall Street,” a senior McCain official said. “The only way we can do that is by reforming Washington first. We will show McCain and Palin as the ticket who will take action on the economy and make sure the taxpayers aren't stuck with the bill.”

Obama aides say he will hammer the message that the market upheaval shows that the country can’t afford four more years of policies aligned with those of the current administration. His running mate, Sen. Joe Biden (D-Del.), was already scheduled to give a major speech Monday in St. Clair Shores, Mich., and is likely to get heavy coverage for his fiery elaboration on this theme.

Regardless of which campaign is able to make more hay out of the economic misery we are facing, the shift from personality to policy, if only for a bit, will be welcome. Pass the bread and butter!