This is a reader post stolen from TPM:

So, Geithner has announced the next phase of the bailout plan -- the FDIC will partner with hedge funds, private equity funds, pension plans and other large institutional investors to buy loan securities off of the banks. Hopefully, they'll do this at prices that will allow the government and its partners to make money over time while not forcing the banks to take excessive writedowns now.

The plan could work but its problematic at best and it focuses on helping the wrong people - institutional investors rather than ordinary citizens.

It's inevitable that if anyone makes money at this, they're going to be politically well connected and we're going to have to discuss some uncomfortable relationships among members of the Obama administration. For example, Larry Summers was a partner at hedge fund giant DE Shaw Group and so we have to ask ourselves whether or not it's appropriate for Shaw funds to participate in this.

The beauty of the Geithner plan is that if the private interests win, the Treasury wins too. But the public only wins in the abstract. At best, if you're covered by a pension fund that participates you get some benefit. But if this is really a great deal for private investors, shouldn't there be some sort of mutual fund set up so that smaller investors can participate directly? Heck, if this is really going to work, maybe the government should agree to use positive returns to pay out a dividend to every citizen?

It's stunning to me that in the wake of AIG I'm now being asked to help well connected hedge funds get a good deal on mortgage backed securities. I'm also concerned that if these mortgage backeds really do represent some reasonable future return that the hedge funds would have bought them already or will eventually buy them without public financing and guarantees against losses.

So perhaps the plan can "work." Some of the mortgage-backed securities will rise, eventually, and perhaps the Treasury and the hedge funds will make some money. There's no reason to be certain this won't happen. It's not necessarily certain that taxpayers will, in the long run, pay for the program.

But: this is not a fair solution. A limited number of government-selected, very rich investors will be given the chance to make no-lose bets. You and I are not being invited to make the low-risk, high-gain purchases of the securities. Maybe this would be OK if it were the only way to deal with the emergency. But there are other, better ways to deal with the emergency.

The best way would be for the government to offer mortgage relief directly to homeowners. This is how it would work: the government offers to pay for a large chunk of the under-water mortgages (in which the house is worth less than the mortgage owed). The mortgage is the same, but the government pays for a large percentage of it. And then the government gives the homeowners long-term, low-interest replacement loans that are locked in. In the end the bailed-out homeowners must pay the government back.

This costs the government, in the end, no money. Most people can be made to repay long-term loans at much lower interest than their mortgages. Also: by guaranteeing mortgages, this plan raises the prices of the mortgage-backed securities and floats the ass-hatters and dick-wads and shit-sledders of Wall Street. Also: this improves the credit of people with bad mortgages and thus makes new lending really possible (because lending doesn't start just because banks have money -- there have to be non-bankrupt people to lend to). Also: this gives lots of regular people without enough spending money a lot of money to spend right now.

So: the above plan (proposed months ago by Martin Feldstein) would float the banksters and strongly stimulate the economy. It would provide real relief to real people, and it would reduce debt, which the Geithner plan would not do. Debt must be reduced if the economy can ever really get moving again. The Geithner plan may conceivably fix the financial system. But it is not fair, it does not relieve present suffering, and -- most importantly -- it does not stimulate the economy.

The stimulus needed now is not in Obama's stimulus package passed in February. The stimulus package's programs mostly take effect over the next two years. But the violent contraction is happening now and the consequences will last a long time. The stimulus needed now, the stimulus that would keep jobs from bleeding away and keep companies in business, is a stimulus to lending. This can only happen if debt is reduced. Geithner's plan will NOT stimulate the credit markets, because flush banks will not lend until there is a more general reduction of debt.