Prior to yesterday's breakdown, most Democratic leaders were clearly on the side of supporting a quick agreement, even though it might mean they'd have to cave in on a few key concerns.  This eagerness to support the bailout was based almost entirely on their fear that the Republicans would eviscerate them politically if they were portrayed 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.

Congressional Democrats now have the political cover they need to propose a 'solution' that is so populist, it is almost guaranteed to be vetoed by George Bush. They must not be afraid to demand the sun and the moon and the stars.  They must demonstrate to the electorate that no House Republican is going to 'outpopulist' them.  They need to propose legislation that is so populist, it either forces the Republicans to oppose it politically, in which case they lose in November, or they agree to it, giving the Dems everything they want for the citizens of Main St.  That, of course, will also mean that they lose in November.

At the very least, they need to start talking about the 'Swedish Plan' [temporarily nationalizing the banking industry] that economists Brad DeLong and Paul Krugman have already publically endorsed.  My own suggestion is somewhat different: Instead of using taxpayer dollars to buy up worthless securities, Congress should use $1-$2 trillion to pump up the economy on Main St. while Wall St. is going through its 'shake out.'  First thing to spend the money on?  Use maybe a trillion of those dollars to set up and fully capitalize a Taxpayers’ Bank that would provide loans and reasonable credit access to all non-financial corporations and small businesses while the meltdown in the banking sector is unfolding.  It could also provide emergency re-financing to homeowner’s struggling with unfair mortgage payments.

If loan demand is too weak to sustain the economy, then Congress can simply spend the other trillion on much needed public investments: more highways, modernized highways, state-of-the-art sewerage systems, a cleaned up environment, more teachers, more classrooms, smaller class sizes, an improved quality of education, more police officers, national health care, etc., etc., etc.  Big increases in government spending on these INVESTMENTS would create millions of good paying jobs to replace the jobs temporarily lost while financial companies are going out of business.

Some sort of bank like this would be necessary to protect Main St. from the ‘creative destruction’ occurring on Wall St.  If private banks were to stop lending in coming weeks and months because of the meltdown on Wall St., Main St. would indeed be severely affected IF CONGRESS DID NOTHING.   But, if Congress performs 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.

Once the dust has settled in the financial sector, there will be a few banks and 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 cleaned, 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.

The opportunity facing the Democrats in Congress is huge.  Will they be able to see it?  If they do nothing, the markets crash and they get swept into office in an historic landslide, ruining the Republican Brand for at least a few generations.  They have time now to seek the high ground, to pursue economic justice as well as relief for the innocent.