John McCain and the House Republicans have blown up the Paulson-Dodd-Frank compromise--for that's what House Republican Whip Roy Blunt says that John McCain did:

Roy Blunt: Everybody else seemed to be rushing for a deal and John McCain came back and said, ‘Wait a minute, I think the House Republicans have the taxpayers in mind and I’m with them’...

Now it's time to go back to three principles. There are three options:

Do nothing.

Bailout (a la Paulson)

Nationalization (a la Sweden 1992)

Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization.

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

It might work like this. Congress:

grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship

requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless

the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress

grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury

requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.

In addition, Congress:

grants the Treasury the power to issue up to $500 billion of troubled asset redemption bonds, the proceeds of which are then to be loaned to the Federal Reserve to be used to cover the liabilities of those liquidated firms that the Federal Reserve judges it is in the interest of the taxpayer to have their liabilities paid off in full.

Paulson had his shot. It's time for the Democrats to pass a nationalization in the taxpayers' interest bill and dare Bush to veto it. If he does, then announce that the congress will pass it again the day after the election. And if he vetoes it again, announce that congress will pass it yet again on January 21, 2009.