The crisis is all about banks being afraid to lend money to each other. In order to meet their daily asset requirements, there are times when they need to borrow money from one another for very short periods, on the order of days. That is, they've loaned out $1000 and they find themselves with only $90 on hand when banking regulations say they really needed $100. They run off to the banker next door and he lends them the $10 they need.
The problem is that the banker next door is now terrified that he is lending to a zombie bank. The zombie will go out of business tomorrow and the lending banker will lose the money he loaned. Concrete example: WaMu just went under. The last bank to give WaMu a short term loan lost their money, at least temporarily. Consequently, banks are not lending each other money.
In addition to being able to borrow money from other banks, bankers can borrow money from the Federal government for short periods of time. There is a certain amount of money set aside for this kind of lending. In recent months, the government has massively increased this available cash because it knows the banks are terrified of each other.
This won't last. It seems to me that if you just let this go for about 6 months, the banks who loaned money to crack addicts to buy La Jolla beach houses will go out of business and we'll figure out who is solvent and who isn't. Once the situation calms down, banks will be able to trust each other again and the Fed can ease itself out of the short term lending business, at least back to normal levels. In the meantime, as this Carpe Diem post showed, lending to individuals and businesses is not a problem.
Finally, there is this. Government agencies that start out life with budgets in the tens of billions of dollars spend their first few years floundering and burning money on silly things. You cannot competently staff an agency that big that fast. DHS was a great example of this. Their budget the first year was something like $70B and most of that went down the drain because they could not bring competent contracting officers on board fast enough to spend the money wisely. Now what we want to do is give $700B to a new agency that will rush about buying mortgage backed securities that we all know are overvalued, but we don't know by how much.
Where are you going to find that many appraisers that fast and bring them into the government through the positively glacial government hiring process? More likely, you'll end up with people transferring into this agency from the DMV because they see a chance for a promotion. If we do nothing, the zombie banks will go out of business and the healthy banks will buy their assets using their staffs of trained appraisers. If we give $700B to the government, you'll end up with fry cooks buying real estate in your name.