Hank Paulson's plan to use $700 billion of our money to buy toxic waste from banks is going up in flames. And in the wake of that collapse, speculators who can't short financial stocks are driving up oil prices and slamming the dollar and stocks in the bargain. How so? Fortune reports that oil rose a record 20% in one day -- to $127; the dollar fell more than it has in four years relative to the euro, while the Dow fell 3% -- or 373 points.

Simply put, Paulson is strong and wrong. He was wrong about subprime being contained. He was wrong about oil prices being driven by supply and demand -- the Commodities Futures Trading Commission (CFTC) found that 81% of trades in this July's runnup to $147 a barrel were from speculators. He was wrong about the bailouts of Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and American International Group (NYSE: AIG) stabilizing the market.

And his plan to spend $700 billion of our money -- with unchecked dictatorial power -- to buy banks' toxic waste in reverse auctions will not solve the problem. Financial institutions (FI) will not participate because to do so would cost them capital they can't raise elsewhere. After $800 billion in taxpayer money down the drain, we are no closer to a solution.

What would fix the problem?