So what might happen without a bailout?

So let's say that Congress can never agree on a bailout package, and free market forces are allowed to correct the excesses the deleverage the economy on its own. What might that look like? From an LA Times story:

If the House vote against the $700-billion financial rescue proposal stands, Americans may be in for a test of free-market economics the likes of which the country hasn't seen since the early 1930s.

With the Treasury Department hobbled by the rejection of its plan, the Federal Reserve and Federal Deposit Insurance Corp. are the chief government institutions standing between the nation and the brutally Darwinian process that could unfold if the panicky financial markets are left to sort their problems out alone...

That's something the United States last experienced in the early 1930s, when Herbert Hoover was in the White House. Some conservatives believe that's still the best long-term solution to the problem, though none has gone so far as Hoover's Treasury secretary, Andrew Mellon, who said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rottenness out of the system."...

For now, the Fed and FDIC are doing what they can.

Early Monday, the Fed pumped an extra $630 billion into banks around the world. Its goal: to keep money flowing through the financial plumbing that's hidden from view but is crucial to the global economy's operation....

For the Fed, the problem is that with business confidence so shaken, the banks on the receiving end of its latest flood of cash are parking the money in their vaults rather than lending it out to keep the economy functioning. Bankers worry that they might need the money if conditions keep getting worse....

Little cash is available for growth and job creation. But there's a more immediate danger: To an extent little appreciated by most Americans, businesses today no longer pay for their day-to-day operations with their own money but do so with borrowed funds.

Making next week's payroll or buying the supplies workers need to do their jobs tomorrow depend on loans. Without those loans, companies and the economy as a whole begin to grind to a halt.

The slowdown is feeding other problems that plague the nation: plunging home prices, the imploding value of mortgage securities and collapsing confidence. Among other things, that's all but certain to push more financial firms over the edge.

When that happens, the Fed and the FDIC have only one course of action: to pick and choose among collapsing firms, deciding which ones get a soft landing and which ones crash....

If Washington's rescue resources were to run out, the nation's investors, traders and lenders could discover that it was up to them alone to right the financial system.

That's a situation that has not occurred in more than three-quarters of a century, during the Great Depression.

"This is smacking more and more of the late 1920s and early 1930s," said New York University economic historian Richard Sylla.

In fact, in a less disastrous manner than during the Depression, something like Mellon's prescription of across-the-board liquidation is now underway.

And without a big, new program like the one rejected by the House on Monday, there is only so much the existing institutions can do.