Today was an amazing day.

I truly did not expect the house to kill the bailout bill.

Neither did the market, as the Dow dropped 777.7 points, the worst one day decline since the 1987 crash.

The leaders of the country played a stunning game of political brinkmanship, with the majority of Republicans voting against the bill, in part due to a stridently partisan speech given by Nancy Pelosi.

Blame is to be had on all sides.  The Democrats tried to attach amendments to the bill having nothing to do with the crisis which would instead satisfy their backers, such as passing laws forcing boards to have union representation. 

The Republicans were no better.  Tonight on CNBC's Fast Money, a Texas GOP Congressman who voted against the bill offered several so-called free market solutions to the credit crisis, one of which was cutting capital gains taxes, a mind-boggling display of economic cluelessness and/or craven ideological and political pandering.

The White House also deserves more than its fair share of blame.  For so long, the mantra from Bush and Co. was that the economy was fundamentally strong.  The Bush administration's disdain and contempt for others who were not onside bred suspicion and hostility, such that the White House no longer has the moral suasion to lead when leadership is most required.  Given the administration's lack of credibility, it is not surprising Congress would be highly skeptical of the White House, especially when the original proposal appeared to abrogate the constitution.   

However, the reason why the House failed to pass the bill was that constituents were overwhelmingly against it.  Representatives in swing states voted against the bill, fearing they would lose their seats in November.

Well, democracy is messy, but The People may have sealed their own fate.  C'est la vie.  That is their right.  But whatever one might have thought about the bill, the markets - both stocks and credit - certainly hated that it failed to pass. 

Perhaps over the long run, the bill's failure is a good thing.  It may be that a purging of the markets will clean out the excesses so rampant in the financial system today.

Or, it may induce a terrible crash and reductions in credit, with tremendous ramifications throughout the broad economy.

There has been talk in certain quarters of another 1930s-style Depression.  That will not happen.  There are too many structural stabilizers in the system to prevent such a catastrophe.  But we could experience a sharp recession.

If we do have a significant economic contraction, this is the recession we should have had after the collapse of the Tech Bubble.  At the time, the authorities made a conscious decision to implement policies to avoid a severe recession, particularly Alan Greenspan's decision to lower the Fed funds target to 1% and keep it there.  However, fiscal policy and the decision to give Americans a massive tax cut without any reductions in spending also contributed to this mess.

The primary effects of these policies were to push the pain further into the future, and to create even bigger problems in the housing and debt markets.  Now, the chickens have come home to roost, and the problems are far worse than if we had just taken our medicine during the early part of the decade.

So what to do now?

First, the market usually does not bottom the day after it closes on its lows.  Thus, it is highly unlikely today was the bottom.  Expect the market to fall further.

Second, it is my guess - and I strongly emphasize the word "guess" - that a near-term bottom is approaching in terms of time.  In terms of return, I have no idea.  I have no clue if the near-term bottom is 200 or 2000 points away.  My intuition tells me that we are going to hit a bottom sometime within the next two weeks.  But that does not mean there will not be acute pain before then.

Next, we are working without a net.  Washington has no credibility on Wall Street.  Despite the platitudes on television from the politicians tonight about getting a bill done, there is no reason to believe them, nor is there any reason to believe any new bill would be effective.

Now, I do not think that Paulson's plan would have stopped the rot in the system. But I do believe the bill would have cushioned the fall. 

The effect of Paulson's bill, however, may have been to prolong the adjustment process, spreading the pain out over time.  We may go through a traumatic period, but a shorter period compared to the Paulson plan, where the excesses are purged quicker.  If so, this will ultimately be good for the market and the economy over the long-term.

Finally, in a bear market, the most important thing is to protect your capital.  If you are long and cannot take the pain, get out.  There will always be opportunities in the future.

The lower we go, though, the higher the future returns become.  Every drop in the market decreases the values of stocks and increases the potential returns over time.

You have to decide where you are on this risk/return spectrum.

I am very, very short at the moment.  I covered a small portion this afternoon and will be looking to cover more into further weakness.

I also intend to start adding to long-term positions.  I believe that some stocks are getting to levels where historically, they have been doubles or triples a few years out.

But in the meantime, we are in unchartered waters.