Let me be as blunt as I’ve been in a awhile in this space: we need the RTC. We don’t need to clean up a few bad assets here; we need to clean up likely thousands of banks and financial institutions that made bets tied to mortgages that they never thought they’d lose on. We need to restore faith in our banking system, no different than we need to restore faith in our nation’s mortgage markets.

We have the model. The only question that remains is this: will we use it?

The RTC was created in the wake of the savings and loan scandal of the late 1980s. It sold off the assets it was stuck with from failed S&L’s, and was a success in doing so. Here’s the difference between the RTC and Geithner’s plan (details here), in which the government will subsidize to investors to buy up toxic assets from banks:

This plan… isn’t the RTC — it’s not even close. The RTC pioneered public-private equity partnerships in the liquidiation of real estate, yes. But don’t be fooled by the partnerships that appear likely to be unveiled here; the RTC existed to sell assets of already-siezed financial institutions that didn’t have enough assets to cover their debts — not to see investors put up 3 percent equity as part of a strategy that will see the government buy and hold “assets” to maturity.

I’ve never heard a coherent explanation from the administration on why no one is pushing to use an idea that has already been proven to work. We can probably expect the RTC idea to gain more traction, as criticism of the Geithner plan rolls in.

The details don’t seem to matter on Wall Street. Bank shares are rising and the financial sector is pinning all its hopes on the biggest bailout in U.S. history as the only way out of a credit crunch that threatens to take down the market and the entire economy.

But slow down. Outside Wall Street, not everyone is impressed. As federal officials and Congress work to put together a plan, critics are claiming the whole thing is a huge mistake. In the blogosphere, even people who don’t particularly like economist and former Labor secretary Robert Reich are citing this essay, in which he calls the Bailout of All Bailouts a bad idea.

From Reich:

A better idea would be for the Fed and Treasury to organize a giant workout of Wall Street — essentially, a reorganization under bankruptcy, for whatever firms wanted to join in. Equity would be eliminated, along with most preferred stock, creditors would be paid off to the extent possible. And then the participants would start over with clean balance sheets that reflected new, agreed-upon rules for full disclosure, along with minimum capitalization. Everyone would know where they stood. Bad debts would be eliminated. Taxpayers wouldn’t get left holding the bag. And there would be no “moral hazard” incentive for future financial wizards to take giant risks with other taxpayers’ money. Congress, the Fed, and the administration shouldn’t be giving more help to Wall Street. Policy-makers should focus instead on people who really need a safety net right now — workers who have lost or are about to lose their jobs, who need extended unemployment insurance and health insurance for themselves and their families; homeowners who have lost or are likely to lose their homes, who need additional help meeting mortgage payments and reorganizing their debts; and people who have lost or are in danger of losing their savings or pensions, who need better insurance against possible loss.

They’ll be more of this today, even before a plan gets put together. I’d expect a backlash because any bailout will appear to let banks off the hook for their egregious and greedy behavior.

It will be interesting to see if the Federal Reserve and Congress can come up with something that also makes the financial sector seem to share in the pain before it can get rescued by the taxpayers yet again.