Thank goodness someone has a plan. Don't bother me with the details, just do what it takes to fix it and let's get on with our busy daily lives.
First, a summary of the problem via Paul Krugman:
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.
3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”
One big question will be "how much will the government pay?" As law professor Hal Scott notes, pay too much and the public will be outraged. Pay too little, though, and we'll fail to accomplish our objective. Another is whether this is even the right model. Some, such as Krugman, have suggested that the Fannie Mae bailout from a few weeks ago is a better model, with the government actually taking ownership.