I’m watching the Bank of America -Merrill merger press conference in shock, reflecting on the fact that coupled with Lehman, it means that the housing crisis has now led to the collapse or takeover of three out of the top five U.S. investment banks in a matter of months. Add the Fannie and Freddie bailout to the mix — and the fact that one of the world’s largest insurers, AIG, is also faltering — it’s a pretty scary proposition for the economy, which I’m now thinking hasn’t come close to bottoming out. These were not fly by night operations, but vaunted institutions that you never thought were going anywhere.

The one positive aspect of the news today is that the Fed and the Treasury Department finally drew a line in the sand and decided not to step in with yet another bailout (in hindsight, we see what a farce the Bear Stearns action was, since Lehman ended up collapsing and Merrill ended up having to seek a buyer anyway). This is what happens in capitalism. Companies mess up, and no matter how big, they’re allowed to fail and lessons are learned.

Unfortunately, in this presidential election, we’re facing a choice between two candidates who have varying degrees of hostility toward markets. The new McCain-Palin TV ad calls for, “tougher rules on Wall Street to protect your life savings.” McCain may support lower taxes than Obama, but he still has the regulatory itch.