With $700B, or even, I daresay $350B, the government could, instead of
bailing out mismanaged coroporations and people who took on
disproportionately large debts compared to their incomes, pay off the
mortgages of middle class Americans (those who make, say, less than
$150,000 a year) who still hold a job, and who have faithfully serviced
their mortgates since before and even through this crisis. What effect
would THAT have on the economy?

A few speculations:

1. The creation of a new investor class.
2. Investment in a faltering stock-market would skyrocket.
3. The purchase of goods and services would rebound dramatically.
4. The mortgage companies would be absolved of much of the debt they
currently hold (since it would be paid).
5. Many of the now "toxic" mortgage-backed securities would be restored.
6. Credit markets would loosen.

  Of course, a sweeping and radical move of this kind would never take
place due to the many special interests spending hours and millions on
lobbying Congress and Treasury to bail out their particular mess. And,
of course, the fiscally responsible, gainfully employed majority of
Americans don't really have a lobbying firm pushing their agenda, they
figure that Congress is supposed to do that for them. The reason that an
economic bailout feels so wrong even to supporters is because deep down
we know that we're putting good money after bad. What if we just put
good money after good instead?