It is too early to know what RTC II will look like, but $800 billion is the number being bandied about. The projected design raises some questions.

The Treasury will run the program to take on illiquid mortgage-related debt [emphasis added], with the Federal Reserve consulting on its design, officials said. ...

Mortgage paper stuffed into derivative structures such as collateralized debt obligations are not trading and is contributing to the death spiral on Wall Street as continued markdowns or even the inability to price the structures have eaten away at the balance sheets of the companies which hold the products.  However, the problems extend beyond derivatives.  Banks hold vanilla mortgages on their books, and many banks have yet to mark down the value of these mortgages.  Writing down a bank's loan book impairs the bank's assets and it's ability to extend credit.  Will the program allow banks to offload their loan books to the Treasury?

The assets are for sale now.  The problem is that asset managers do not know what to pay.  There have been a few transactions, but not many.  The government is banking on the housing market and the credit markets stabilizing so that investors will have more confidence to buy mortgage paper. 

But what if home prices still have another 15%-20% left to fall?  Home prices are still over-valued, the economy still deteriorating, and the consumer over-leveraged with impaired cash flows.  If home prices continue falling, there will be further mortgage price deterioration, which will inhibit the buying of mortgage securities. 

Now, the government will be able to hold those deteriorating mortgage securities within RTC II until the market stabilizes.  However, the purpose of RTC II is to increase confidence in the financial system and to facilitate the increase of the flow of credit.  If home prices continue to fall, banks' balance sheets will remain under pressure and the creation of credit will be inhibited, even if the banks can offload their bad debt to the government. 

If this scenario plays out, as I expect it will, RTC II will still serve a meaningful and vital purpose.  Similar to automatic stabilizers such as social programs which cushion recessions, RTC II will cushion the problems in the credit markets and prevent an even worse outcome. 

However, social programs do not solve recessions.  Recessions come to an end when the market prices for labour and capital clears.  Prices for labor and capital have to fall to a level such that expected returns are high enough to entice investment back into the economy.  Government spending can cushion or stabilize the economy, but until the clearing price within the economy is at equilibrium, at best the economy will be sclerotic. 

The government, in fact, may inhibit the repair process if it endlessly delays the attainment of the clearing price within the economy.  This is what happened in Japan, and why many have made the Japanese analogies to America today.

In fact, one could make a cogent argument that we are in this mess because the government never allowed market prices to clear after the collapse of the Tech Bubble.  By inflating our way out of the tech collapse, we avoided taking the medicine we needed to clear out the excesses in the economy.   The secondary and tertiary after-effects of these policies created an even bigger asset bubble and more daunting problems in the economy, which almost certainly would not have happened had the Federal Reserve not kept interest rates so low and the government not run enormous deficits.  It is easy to be an arm-chair critic in hindsight, but by not taking our medicine, we merely delayed the inevitable and made the problem worse.

Similarly, If RTC II delays the attainment of the clearing prices within the mortgage and housing markets, economic growth will be slow at best and possibly delay and damage the economy at worst. 

Now, it may be that the alternative would have been worse, i.e. the collapse of financial system.  However, RTC II does not solve the underlying problems in the financial markets of too much debt and the lack of transparency.  Nor does RTC II solve the problems in the housing markets where prices are still too high. And it does not solve the problems of the economy, which is in a recession.

Until market prices clear, home prices come down and the consumer's balance sheet and cash flow repaired, economic growth will remain below trend and asset market returns will be sub-par.