Paulson's first bailout plan failed to pass in the House today even though more Democrats than Republicans voted for it. Confusing times these are. I dont know what will happen next but Im glad the plan failed.

Most people seemed to oppose the plan but there doesn't seem to be any real consensus on the reason why nor any real clarity on what the plan did or what it "fixed". Reading blog comments, I see all kinds of twisted thinking.

I've been writing about the housing bubble for over 2 years now but it seemed like the government woke up from a long nap and had an epiphany: the fundamentals are not sound - we are in a crisis!! Although the reasons for not voting for the plan are legion, most economists I have heard of did not support the plan so maybe we will get a better one soon - one written by economists not by CEO's or politicians.

The main reason I opposed the plan is that I didnt hear anything in it that would have prevented the current crisis from repeating once investors had digested the $700B.

My analogy is that our leaders suddenly realized that our house of debt was made of cards. The Paulson plan was to pay $700B for a sturdier table underneath our house of cards. The next time there is a strong wind, our house of cards will be right back here in crisis again. What we need is a house of straw or sticks or maybe a plan to get a house of brick. What we need is regulation and reform.

But I havent seen anyone in Washington talking about that. What exactly IS the crisis? If we cannot agree on the problem, how can we agree on the solution?

Over and over I hear that home loan foreclosures are the problem. Home foreclosures are still under 5%. Foreclosures are not new. How could that bring down all the banks and collapse the economy?

Now I hear is that the corporate paper market is essential to our economy and it almost shut down last week. How could home loan foreclosures stop all corporate lending?

What they arent telling us is that the home mortgage market has been changed forever and those changes (the creation of the CDO and CDS) quietly but fundamentally changed our economy. In a bad way.

What they arent telling us is that this change has been going on for years and it has been plain as day. These changes created a lot of wealth in the bubble but they also set us up for this crash and they complicate any plans to fix things.

How do you re-negotiate a mortgage for a troubled home buyer if you dont even know who owns the mortgage?

Turning a home mortgage into a security may have sounded good but it changed the idea of risk so completely that it landed us here. Any "solution" needs to specifically address these new financial vehicles.

As far as I could tell, the Paulson plan was to pump so much more debt into the system, housing prices started to go up again. If home prices went up again, we wouldn't need to resolve the CDO/CDS mess and everyone would start making money again.

But home prices aren't going to go up again because people don't have the income to pay for them. (Remember income? Its what you are supposed to use to buy things not "available credit".) The bubble created unsustainable prices and $700B wont change that.

Other people are floating similar plans that will "save our economy" by spending tax dollars to pay the mortgages of people that cannot afford their homes. These plans are equally suspect because they try to avoid the laws of economics. Houses cannot stay as expensive as they have been and the mortgage-backed securities that were sold for those mortgages are not worth their face value.

I dont know what will happen next but I think a bad year or two would be healthy for us. We have become so wealthy and people have such a sense of entitlement that a little humble-pie would do us good. It wont feel good but maybe it will cause folks to be a little more careful and thoughtful. Maybe a leader or two will emerge from the flock of sheep we have now.

Or maybe that is just as wishful thinking as Paulson's plan.