The banks and financial institutions are in trouble largely because of bad mortgages, i.e. mortgages that borrowers (consumers) are having difficulty paying. And, any attempts to sell in a down market tend to make the problem worse.

So, understanding that any solution will be unfair, or unevenly distributed, or will have winners and losers, why not bail out the people at the bottom of this food chain? Here's a proposal:

1) The Federal government will pay (make an equity infusion) of 20% of all outstanding mortgages. Whatever you owe today, the Feds will cut a check for 20% of that amount to your lender. Essentially everyone gets a down payment, or everyone instantly gets more equity in their home.

This would have to be means-tested, so that the very wealthy did not benefit, maybe one's net worth would have to be under $1MM. Note that moderately wealthy or upper middle class would HAVE to be included, so that the banks that lent to them would get some meaningful relief. If only the small loans of poorer people were part of this deal, the banks would still have too many big ones that were under water.

2) All the borrowers who want to (not compulsory) would have the opportunity to re-finance, at a fixed rate for 10, 15, or 30 years. Since adjustables rates were part of the problem, the idea would be to give all these consumers an absolutely predictable, and affordable, interest rate and mortgage payment.

The rate would be (something like) six percent. Fixed.

3) Ensure that the banks don't lose money on these new, re-financed mortgages. All these new mortgages would be in a defined pool. Every bank could borrow, from the Fed, money needed to support there new pooled mortgages at (let's say) 4.5 percent. Banks have to make money too, and if their funding rate on these 6.0% loans was 4.5%, that should work out.

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