Game Plan: Feds Need to Buy Mortgage Insurers

U.S. banks are taking a beating in the market because of the billions of dollars in subprime mortgages they have on their books. And with the insurers who backed the loans in danger of going belly up, there doesn’t seem to be a bottom for these stocks. If that ever happened, Cramer said, the entire system would collapse dominoes style.

It’s his ultimate doomsday scenario, and he fully believes it could happen if the government doesn’t act quickly. But instead President Bush announced plans for a stimulus package that would put a small chunk of change into the pockets of American taxpayers. Washington seems to think that consumer spending might be the jumpstart this economy needs.

But Cramer thinks differently. And that’s why he laid out his Game Plan for saving the U.S. economy Friday.

The government needs to buy these mortgage insurers and mortgage-backed and municipal bond insurers – MBIA , PMI Group , MGIC and Ambac – he said. The insurance covering municipal bonds could be sold to Warren Buffett or the highest bidder. Then Washington could guarantee the loans at 50 cents on the dollar. That way, even if all of the whole $500 billion worth defaulted, it would only cost $250 billion to lift the economy out of this rut.

But most likely no more than half of that $500 billion would need to be covered, Cramer said. More important than just the money, though, is that Wall Street would then have the certainty it so desperately needs. Banks likes Citigroup , Washington Mutual , Merrill Lynch , Wachovia , Bank of America , Wells Fargo and Countrywide Financial could assess their losses, build reserves and start lending money again, he said.

Add a 100 basis-point rate cut to Cramer’s plan, and he figures the Dow would add 2,000 points in two weeks. Should Washington choose to accept his mission, it might prevent what he called “the end of the world – or at least another 2,000-point decline in the market, which in my view is about the same thing,” he said.

Jim's charitable trust owns Citigroup.

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