Prior to yesterday's breakdown, most Democratic leaders were clearly on the side of supporting a quick agreement, even though it might mean that they would have to cave in on key concerns.  This eagerness to support the bailout was based almost entirely on the political worry that the Republicans would eviscerate them politically if they were to be seen as ‘obstructionist.’  Now, it is no longer possible for "the Republicans" to condemn "the Democrats" for being opposed to the bailout, because the Republicans, themselves, are opposed to it, or at least half of them are.

What this means is that Democrats are now free to stake out a position on the current fiscal crisis that is based on principle, rather than on raw political calculation.  Perhaps the time is now right for Congressional Democrats to take a page from Barack Obama political notebook and look for a compromise position they could embrace vis-a-vis the House Republicans that would reassure Average Americans that the Democrats are, indeed, on their side.  Here's what they can do:

They can say that they are now willing, in a spirit of compromise, to join with conservative Republicans in opposing the bailout, but only if certain safeguards are taken to protect Main St. from the consequences of Wall St.’s meltdown.

If Congress washes its hands of Wall St. [and The Federal Reserve also chooses not to take any action] the banking meltdown everyone expects would put an effective freeze in lending.  This would throw the economy into a deep recession unless something is done.  Instead of using taxpayer dollars to buy up worthless securities, Congress could use taxpayer resources to set up and fully capitalize a Taxpayers’ Bank that would provide loans and reasonable credit access to all non-financial corporations and all households while the meltdown in the banking sector is unfolding.  It could also provide emergency re-financing to homeowner’s struggling with unfair payments.

This bank would be essential in protecting Main St. from the ‘creative destruction’ occurring on Wall St.  Why so important?  It’s because our economy is essentially addicted to debt.  If all citizens were to stop borrowing money tomorrow and start saving for all their purchases instead, the economy would plunge into the Greatest Depression Ever.  Borrowed money is spent money.  Spending is essential to the existence of jobs.  Recessions occur, and unemployment grows, when aggregate spending declines, as it does in every recession.

If private banks were stop lending in coming weeks and months because of the meltdown on Wall St., Main St. would indeed be severely affected if Congress were to fail to sustain Main St. with an independent source of loanable funds.   With a little bit of Congressional Bypass Surgery, it would actually be possible for Main St. to enjoy an economic boom at the same time that the private banking industry is allowed to crumble into dust.  

When the dust has settled, there will be some banks and some insurance companies that will survive, trillions of dollars of bad debt will be written off, many bankruptcies will occur, and all the survivors will start out at a much lower level of measured net worth.  But then the slate will be cleared, private banks will again be free to lend in an environment where much of the risk has flown out the window.  When the financial sector has recovered, Congress will be free to re-privatize the government banks if that is what it wants to do.

Along with a big boost in government spending on public investments this sort of Alternative Taxpayer Protection Plan would insulate the taxpayers living on Main St. while the gamblers in the banking industry and on Wall St. come to terms with the full meaning of moral hazard.

It's the kind of compromise that will provide the American people with some economic justice at the same time that bankers are swallowing some bitter medicine, medicine that they planned to give to us...