The financial crisis is one of confidence in the financial institutions, and worry that they may fail.
Why might they fail? Because they contain financial instruments (traunches, Collateralized Debt Obligations, Mortgage Backed Securities, other things) which contain an unknown mix of probably good paper and subprime mortgage paper, and the value of these instruments can't be determined because many subprime mortgagees may default on their loans.
At the same time, real estate values are declining, in large part because of increased foreclosures due to the sub-prime lending practices of the last ten years or so. (It is also true that there has been a speculative bubble in real estate prices. The portion of the decline in prices due to this won't be recovered any time soon.)
If the government bails out the financial institutions by buying up tainted securities, credit will still tighten up as foreclosures proceed, with no guarantees for the homeowners who are, to some extent, victims of predatory lending practices. This prolongs the financial crisis indefinitely, and treats the problem at the wrong point in the system.
If, instead, the government backs the homeowners, by guaranteeing to some debatable degree their mortgages, and by insisting that their loans be renegotiated to terms they are more likely to be able to meet, then the number of foreclosures stays low, and rational risk assessment and valuation can be done on the financial instruments that contain the subprime mortgage paper.
Such a solution addresses the underlying worries of both homeowners and financial institutions instead of helping one at the expense of the other, which is what the Bush Administration's plan does, and is far more likely to restore confidence in the economy.
There are other reforms needed, of course. Deregulation - the foolish Gramm-Leach-Bliley bill of 1999 - must be repealed and the regulatory environment of Glass-Steagall restored. Fanny Mae and Freddy Mac should be re-nationalized permanently. A culture of honesty and integrity must be fostered. But none of this will avert the coming depression without home loan guarantees, widely and loudly proclaimed and implemented.