George W. Bush may be a disappearing lame duck, but he is not through doing damage to the Republic. His half-baked rescue of Fannie Mae and Freddie Mac leaves another stink bomb on the Oval Office desk for the next President. Bush left the heavy lifting to Treasury Secretary Henry Paulson, a Wall Street guy who naturally fashioned a Wall Street-friendly deal: get the public’s money but don’t make any promises.

In this case the taxpayers are on the hook for some $100 billion for each of the failing mortgage giants. The deal stinks because it doesn’t really solve anything. Fannie and Freddie executives got sacked, but nothing substantial was changed in the weirdly illegitimate structure of these private, profit-making corporations sponsored by the federal government. Instead of acting decisively, the Treasury basically opened the public’s wallet and promised to spend whatever it takes to keep the companies upright. “Conservatorship” is a fiction. The taxpayers own these two high-flying turkeys in all but name because they are now picking up the tab.

A real solution to this mess is not complicated: wipe out the corporations and nationalize them, buy out the shareholders for pennies on the dollar and restore Fannie Mae to its original status as a federal housing agency (maybe merged with Freddie). Its functions involve vital public services–supporting the flow of mortgage financing, encouraging broader homeownership and subsidizing construction of low-income housing. These public goods do not much interest private financiers unless they can harvest rip-and-run profits, which is exactly what they did, with their usurious lending in the subprime mortgage scandal.

Paulson and other Washington players are focused instead on “investor sentiment,” that is, trying to halt the panicky flight of major creditors. If other nations join China in selling off their Fannie/Freddie portfolios, the credit crunch will become a deadly stranglehold. This is the reality of our debtor nation’s dependence on supposed rivals, who are propping up America by lending to us. If they decide to stop, Uncle Sam is screwed.

Instead of rescuing financial losers, the government ought to be devoting its heaviest resources to jump-starting the real economy. Instead of bailing out the money guys who caused this crisis, Washington should concentrate on bolstering enterprise, employment and productive investment.

Washington has got it backward. The financial system will not get well and return to normal lending until the economy regains its natural vigor. Bankers’ fright is sure to deepen as more firms fail; witness the tottering Lehman Brothers. Given the depth of this crisis, only the government has the ability to provide the needed stimulus, by spending money on real economic activity–programs that create new jobs and incomes, production and profit.

Does Barack Obama or John McCain understand this? Neither candidate has acknowledged the enormity of what’s facing the country or explained the dire implications with clarity and frankness, much less described plausible solutions. McCain is hopeless, mouthing right-wing bromides about corporate tax cuts and smaller government. Obama has said useful things about financial reforms and has supported some infrastructure funding, but he too has lacked the courage to tell the hard truth about the ditch the country is in and how to get us out. Obama’s limited comments suggest he sees the crisis much the way Washington does. That won’t be good enough if he becomes President–though a deepening crisis may force him to take bolder action.

Whatever the two candidates claim to believe now, one of them is going to get walloped in January when he enters the Oval Office.