Blow It All Up; Go Back to the Drawing Board

That would be my advice to Congress after the House repudiated the $700 billion bailout plan, 228-205. I've read enough online comments to realize that Wall Street is stunned, perplexed, and not a little bit irritated. But I think that reaction just underscores a growing gulf between the two streets, Wall and Main. Joe Sixpack hated this bill with a fury, and that's what Congress has been hearing.

Now I think legislators have two choices (short of nudging 12 members into changing their votes):

Incrementalism (if you like sports metaphors, call this “going short”): Scale back the size and scope of the rescue. One suggestion floating around would provide for $150 billion in low-cost loans to companies weighted down with too many bad assets backed by U.S. home mortgages.
Advantages: Easier to marshal political support on both sides of the aisle. Sidesteps knotty questions of what to pay for hard-to-value toxic financial waste. Minimizes government involvement.
Disadvantages: May be too little to restore confidence and fix ailing firms. Could leave the Treasury Department and Fed injecting funds into the U.S. financial system and stamping out fires for years to come as the economy muddles along.

The “Bear Hug” (or, “going long”): Have the government aggressively take ownership stakes in financial firms in return for buying bad assets and pumping in capital. Try to weed out weaker companies that are insolvent and so badly run they don't deserve to survive.
Advantages: If we can get our arms around the whole problem at once, that could reduce the chances of a drawn-out resolution where good money is thrown after bad. Protects taxpayers better from losses. Also, a government that drives hard bargains (as Sweden did with such a program) will motivate financial firms not to seek Treasury help and to find private funds on their own to recapitalize.
Disadvantages: Wall Street won't like this one, after the tantalizing mirage of being able to dump their toxic waste at above-market prices under the original Paulson plan. And politicians too may balk at the size of the effort and the ideological implications.

Time to get a dialogue going. Two places to start: what Chile and Sweden did during their financial crises, with good outcomes.