The decision by the Federal Reserve to loan insurance giant AIG $85 billion in return for as much as 80% ownership of the company is by any measure dramatic. The takeover early last week of Fannie Mae and Freddie Mac represented the culmination of years of intermingling of public and private interests. But the AIG move is de facto a government nationalization of an ailing private company, which, if not unprecedented, has rarely happened in the United States. Even if the intervention was imperative, its scope is startling.

The crisis on Wall Street has, of course, become a political football. Cries of "moral hazard" and "socialism" on one side are drowned out by charges that the current mess is the result of deregulation, and too cozy a relationship between "Wall Street fat cats" and the current administration in Washington. If only reality were that simple. The blame game will continue, but it won't do much to fix what's broken.

Let's get a few canards out of the way: First, yes, stupidity and cupidity and complacency and hubris are involved, and yes, there is gambling in Casablanca. Second, the idea that there is this thing called "the free market" that governments tame or muck up with regulation is a fiction. Governments create the legal conditions for markets; markets shape what governments can do or are willing to do. Regulation versus free-market is a false dichotomy. Maybe in some theoretical universe, if we could start with a blank slate and construct society anew, it wouldn't be. But we exist in a web of markets and regulations, and the challenge is to respond to problems in such a way so that we decrease the odds of future crises.

The near-miss of Gustav and the laughable (but effective) spin of the Republicans to foreswear politics and put on their “American hats” means that we can now resume watching our regularly scheduled show of politics. Obama’s acceptance speech last week was long on pocketbook issues, and short on foreign policy, and McCain will need to do the same. Indeed, his pick of Palin - who has zero foreign policy experience - highlights that this election is revolving around economic issues.

Difficult economic times are supposed to benefit the party not in office, and in theory, that should be a significant advantage for Obama. But by emphasizing the plight of many Americans, Obama has not gotten quite the bounce that one would think. Why?

Part of the challenge is that no matter how bad the economy is for some people, it isn’t so bad for everyone. The national statistics bear this out, with revised second quarter GDP up 3.3% - which is not a recession signal. Then there is oil. If sustained, today’s drop in oil prices and the sharp retreat back to $100 a barrel after Gustav didn’t do the expected damage will act as a mini-tax cut or stimulus to strapped consumers. Manufacturing activity as measured by the monthly Institute of Supply Management survey (ISM) and durable goods sales are all at decent levels - not great, but hardly catastrophic. Yes, GDP was up in part because inventories were not down as much as initially thought - an arcane aspect of the statistics that says nothing about how individuals are faring. But Democrats have to be careful in the face of data that simply doesn’t support the level of negative sentiment that so many in the country feel.

Many people - especially in the blogosphere - will no doubt object to the statements above. I can hear the chorus “Give me a break! Corporations are getting the lion’s share of the gains; the average worker is squeezed between plunging home prices, soaring energy costs, and no growth in wages. The economy stinks, and anyone who says it doesn’t is a corporate shill, a stooge or an idiot.”

Fair enough, but a significant portion of the country isn’t buying that line, and it isn’t just because of Tom Frank’s “what’s the trouble with Kansas” argument. It isn’t just because some voters chose values over economic interests. It’s because “the economy” isn’t unified, and experiences vary widely. It’s because the economic system is stable even if it is only benefitting a few at the expense of the many.

At any other point in the past, the massive losses in housing and in the financial system would have triggered much more severe economic downturn, but today, because capital is global and so is labor, the effects are more diffuse. There are no massive layoffs, no plunge in spending, largely because most work forces are already lean and wages are already tight. And we have exported trillions of dollars in the past few years, either to oil producing nations such as Russia and the Gulf States, or to China, which has been lending us money to buy their goods. They then use that capital, in part to bail out the very financial institutions that are suffering. The result is fewer bank collapses, and in turn less intense shocks in the domestic economy of the United States.

These issues are not well understood even by people who think they do. The global economic landscape has changed so much so fast that neither experts nor politicians have caught up. Intense feelings of gloom and massive pressures on the daily lives of tens of millions of people don’t easily translate into electoral success, however. For every story of a struggling worker, there are counter stories, or ones that don’t quite fit the simple story of “the economy stinks.” That is why the polls remain stubbornly tight.

Maybe the floodgates will burst and Obama will get over the hump. But there is a lesson in current polls: a substantial portion of the country feels uneasy and insecure - there can be no doubt of that. But precisely why different people feel that way, that is a more elusive question. Articulating a coherent explanation of that uneasiness and offering a path forward will be the key, but the answer won’t come from numbers and data and stats. Relying on those is a losing proposition.

The purchase of Merrill Lynch by Bank of America and the bankruptcy and collapse of Lehman Brothers are the latest - albeit most dramatic - installments of the ongoing credit crisis that began last August 2007. The bailout of Fannie Mae and Freddie Mac, as well as the fire-sale purchase of Bear Stearns by JP Morgan Chase in March were also greeted with fear and dread, and if the past is any guide (which, by the by, it may not be), today will not be the final chapter.

The headlines are predictably hyperbolic, with words like “collapse,” “stunned” and “shocked” repeated ad nauseum. It has also been widely asserted that the turmoil on Wall Street will be an unalloyed negative for Main Street, as credit conditions tighten resulting in further constriction of an already squeezed consumer.

Perhaps the doomsday scenarios will come to pass. After all, in an opaque world of hundreds of billions of dollars of leverage piled on the shaky foundations of low-quality mortgages, anything is at least theoretically possible. And the fact that the system has survived the shocks so far is no proof that it will tomorrow.

That said, there clearly is an echo chamber problem here. The people who report business news are for the most part in the New York region; the people who are employed in the heart of the financial industry are also in the New York region; and the analysts charged with assessing the health of the system and the integrity of individual companies work for the very institutions that are embroiled in the crisis. To expect this group to have any perspective on the current drama is equivalent to asking a resident of New Orleans their feelings about hurricanes and floods.

It is certainly true that Wall Street is facing major issues, just as it is true that in 2002 and earlier this year the airline industry confronted challenges that it could barely deal with in plunging travel volumes in 2002 and soaring fuel prices in 2007-2008. If you worked in the airline industry, it has been a critical and trying time, but hardly a systemic challenge to life as we know it. Granted, the problems in the financial system have wider ramifications: the creation of credit and the free flow of capital are part of the life blood of daily activity. Hence some of the worry.

Nonetheless, the echo chamber is a real problem, as is the self-importance of Wall Street (”we are falling apart, and we are the world”). This crisis is unfolding in the context of a global financial system, which while ungoverned is still real. There is at least $5 trillion in sovereign wealth funds and central banks, much of that in the form of $1.8 trillion in Chinese central banks, and several trillion more in the wealth funds of the Gulf region as a result of the massive transfer of dollars and euros for oil. Those sums dwarf the credit issues on Wall Street, and money does flow globally. The world isn’t capital constrained; the financial markets aren’t capital constrained; U.S. investment banks are.

As for Main Street, millions face foreclosure - there were 272,000 notices issues in July alone. But relative to the number of homes owned (approximately 110 million, of which 75 million are owner-occupied), foreclosures are still a small portion, and while that doesn’t diminish the pain for those affected, it is not a systemic threat to society as we know it. The credit contraction combined with soaring oil prices has led to tightened straits for a majority of Americans, but that too is a far cry from collapse. Only if millions more lose their jobs can we begin to consider the possibility that economic activity contracts dangerously. As it is, while jobs have become more scarce and layoffs more prevalent, there haven’t been the massive layoffs that are the necessary condition for severe downturn.

To say that things are not catastrophic says nothing about perceptions, fears, insecurities and real-world challenges of paying the bills, dealing with health care and education costs, and all the other problems besetting a substantial percentage of the population. But the idea that as goes Wall Street so goes the nation is a mistake that reinforces the self-importance of Wall Street and does nothing to address the challenges of Main Street.