While I dislike bailouts on principle, the current proposal for buying up bad loans is possibly the worst idea in this entire crisis. We will be dealing with the negative repercussions of this for decades. The Washington Post has a great op-ed on better options.
Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.