This isn't just a Wall Street bailout

The backlash against the bailout worked. The House rejected the controversial $700 billion rescue plan on Monday.

But considering that the Dow plummeted nearly 800 points - its worst one-day point drop in history - will there now be a backlash against the backlash?

"Many of the folks writing their congressmen last week to say they were against the plan may have looked at their 401(k)s this morning and are rethinking their position," said Bill Knapp, investment strategist with MainStay Investments, an asset manager based in New York.

Talkback: Should Congress pass a new version of a bailout or just do nothing?
Sure, stocks rebounded a bit Tuesday. But make no mistake. If Congress doesn't come up with some new plan to address this credit crisis, we could be faced with more gut-churning market drops.

I stated last week why I thought the bailout was a necessary evil and I still feel that way.

I understand why people are angry. I'm angry. I am not happy that the government is in this position because of reckless behavior by banking executives, investors, lax regulation by the government and, yes, even consumers.

And I even can concede that there is a lot of merit to the claims by critics that we should let the market sort out the country's credit problems. In free markets, companies should be allowed to fail. And clearly, the market and government let Lehman Brothers fail.

However, in the wake of the Lehman bankruptcy, things just got worse and more dominos fell ... AIG, Washington Mutual, Wachovia, etc.

The crisis is now so pronounced that doing nothing is not really a viable option. And what infuriates me to no end is the refusal by some members of Congress and taxpayers to recognize that the consequences of doing nothing will mean more economic hardship for all Americans, not just bank CEOs, traders and New York City.

Let Wall Street burn. Let Wall Street die. Let Wall Street go bankrupt. That's what people opposed to the bailout are saying over and over.

Don't get me wrong. Wall Street deserves a lot of the blame for the mortgage mess. But it's overly simplistic and flat-out wrong to suggest that this is just a New York or Wall Street problem.

There are a lot of companies that have either already collapsed or are nearing the precipice of failure as a result of the credit crunch ... and many of them are located far from lower Manhattan. That means many jobs are on the line and they aren't just the jobs of traders, blue-blood investment bankers and CEOs.

Washington Mutual (WM, Fortune 500), which became the largest bank to fail in history last week, is based in Seattle and has more than 2200 branches across 15 states. Wachovia (WB, Fortune 500), which dumped its banking assets to Citigroup (C, Fortune 500) in a fire sale Monday, is headquartered in Charlotte, N.C.

National City (NCC, Fortune 500), which many investors are betting could be the next bank to go under, is based in Cleveland. Shares of two other big Ohio banks - Cleveland's KeyCorp (KEY, Fortune 500) and Cincinnati-based Fifth Third (FITB, Fortune 500) - also got pummeled Monday.

SunTrust (STI, Fortune 500), which lost nearly a quarter of its value Monday, is an Atlanta institution. Regions Financial (RF, Fortune 500) plummeted more than 40% on Monday. That bank is based in Birmingham, Ala.

A bank bailout plan of some sort might not stop other banks from going under but it could certainly help minimize the pain in the industry.

"If we had a bailout, it would lessen the likelihood of further bank failures. We may have some more down the pipeline but we would have less with a bailout," said Robert Dye, senior economist for PNC Financial Services Group in Pittsburgh.

If more banks get scooped up by larger rivals or just flat-out go under, that could lead to more job losses in the financial industry. That's not good news for the broader economy.

Fears about more bank collapses have also led to chaos in the credit markets as banks are afraid to lend to each other, which makes them less willing to extend credit to businesses. That, eventually, will be felt by consumers.

"The core of the problem is with credit markets, which is one step removed from Main Street. The average guy and gal is not seeing this yet but if you are a business, you are facing highly elevated costs to borrow money," Dye said.

"And Main Street will definitely feel this eventually. We'll also see higher rates for credit cards and other consumer loans. The cost of credit will rise dramatically," Dye added.

Dye also said that if more businesses start to feel a major cash pinch, they are very likely to cut back on hiring and may even start to layoff workers.

That would add to the this year's 600,000 job losses. In turn, that could intensify the economic slowdown by causing sharp pullbacks in consumer spending.

On top of all that, the current stock market chaos does nobody any good.

I'm not trying to cheerlead the market higher. Many stocks, particularly in the banking sector, should be trading much lower.

But the credit crisis has spilled over into the broader market, hitting shares of many quality companies that are still financially healthy. As a result, $1.2 trillion in stock market value was wiped out in the wake of Monday's sell-off.

That's bad news for more than just hedge fund managers - it hurts the millions of Americans that actively manage their investment portfolios as well as the millions more who have 401(k)s or IRAs for retirement as well as 529 plans to save for their kids' college tuition.

"It's easy to point the finger at the credit crunch being just a Wall Street problem. But it's much more pervasive than that so that's why it's imperative that this be addressed," said Knapp, the investment expert. "If a rescue plan doesn't pass we will see markets sell off further."

Dye agreed. He said the biggest problem with the bailout is that it would in some fashion, allow some companies off the hook for egregiously bad decisions. Nobody is happy about that.

But doing nothing just so that Wall Street can suffer is not the answer either.

"People don't want to reward bad behavior. But we don't want to cut off our nose to spite our face here," Dye said. "This will hurt Main Street very quickly."