On one of many flights this week I was asked the question, “what would you do with the $700 billion of bailout money?” Not an easy question to answer and there has been lots of arm chair quarterbacking on the topic. I’m hardly an expert on financial policy, but in short this was my layover induced answer.

There seem to be two fundamental problems, of many, worsening our current economic quagmire. 1) The housing bubble pushed home prices to levels most working Americans could not afford and to keep the bubble going the financial community became very creative with mortgages and how the risk associated with them was calculated. The end result was lots of people in houses they could not really afford and very little transparency in the risk this created in the financial markets. There is a lot more to the story but for the sake of brevity we’ll leave it at that. 2) Credit liquidity in the current market has almost ossified causing our collective economic gears to come to a rattling halt. Wall Street freaks…the media freaks…the consumer freaks (no spending)…sales of goods plummet…Wall Street freaks again…media fuels more freaking…rinse and repeat.

To break the cycle it would seem logical that liquidity needs to be injected into the market. A lot of pundits have looked at this being solved by the government buying up the bad assets, giving capital to the banks in return for equity stakes, and several other derivative plans. While all these ideas have their merits and risks the idea I exposed on the plane was slightly different. Back to the core issues - I saw the biggest failing being lack of market transparency and a fundamental mismatch between supply and demand in the housing market. So how could we restore transparency to the market while getting people in homes they can actually afford thus freeing capital for consumer spending and financial investment.

My answer was a foreclosure clearing house. This may be Polly Anna and not feasible, but it made for a fun intellectual exercise. There has been lots of talk around providing bail outs to people whose homes are foreclosing, but even this will be short term and will not solve the fundamental problem that they are in a home they cannot afford. The only real solution is to put these individuals and families into homes they can afford. The easy credit and risk shell game that banks ran has created a basic mismatch of people buying supply with demand they did not really have.

The clearing house is a simple idea of providing a transparent market place where people can trade down to houses they can afford and have new loans guaranteed to do so. The loans could be guaranteed by the government but competed for by the banks. Banks that already have the mortgages on existing properties could have the choice of refinancing the house so the owner could afford the payments (that would be their own risk calculation) or entering the home into the clearing house. Also the home owner could have the choice to enter their home into the clearing house if they would like to trade down voluntarily.

The clearing house itself could run like many of the existing home real estate market places matching buyers and sellers (Zillow, Trullia. RedFin etc.). In fact the government could probably contract with one of the sites to run the technology side of the clearing house at a reasonable cost. Once a person’s home was identified for purchase they would then be free to look for a new home in the clearinghouse they could afford. The government backing would allow loans to be made so the individual, now free of the foreclosed home, could buy a new home they could afford. Banks would still compete to provide the best rate and terms to new owner, but the risk would all be transparent to the government since they would be providing financial backing and to the owners so they were not mislead into buying more house than they could afford (again).

In theory this should introduce liquidity back into the market and with a little time put liquidity back into the consumer market since the majority of a person’s paycheck would no longer be going to a mortgage. The market would be transparent again but not run or partially owned by the government. I would argue that it was not capitalism or the market economy that broke during this financial crisis, but a loss of transparency and a resulting hiding of risk. In fixing the crisis the government’s role should be ensuring transparency in the market place so that it can function effectively. My idea is most likely off the deep end, but I do hope government action is centered around restoring transparency and restoring liquidity to the market. If you were Sec. Paulson for a day what would you do with $700 billion? There are no shortage of smart people around the globe. Can we crowdsource an answer?

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