The best solution would be for the Fed to buy up trillions of dollars of these bad assets held by all these banks, Fannie, Freddie, etc., and then just to declare bankruptcy. The assets can be bought at bankruptcy for pennies on the dollar which would be good for the economy to reprice assets to market value, one bank goes bankrupt, (the one that caused the whole thing), and every one else might come out pretty much ok. We don’t go into hyper inflation, because a lot of virtual money goes poof with the Fed.
However, most of the world does not want to suffer the 40-60% deflation that would result.
They will anyway...but they're going to try to put it off.
First, the bank equity holders of insolvent banks (truthful accounting) need to be wiped out, their executives fired, their boards replaced, and their bond holders take a MAJOR haircut.