Here’s Princeton economics professor Alan Blinder on how to solve the mortgage crisis:

Pay close attention to the section that I bolded down below.  His entire “solution” centers around a.) a new large federal government organization (essentially an FDIC for the mortgage market) — call it the Department of Home Security (props to Bill Shughart), and b.) having that government agency centrally set prices.

Sounds like the Deutsche Demokratische Republic Redux if you ask me…

Here’s my favorite part:

SETTING PRICES The HOLC bought pre-existing mortgages at a discount. The Super F.H.A. would use government guarantees to induce private businesses to do so. In either case, we need prices for the old mortgages.

Conceptually, the answer is simple: Haircuts should reflect current market values, which are well below face values. But there is a problem: With the resale market for mortgages virtually shut down, there are hardly any market prices.

The draft legislation is vague on this point, perhaps necessarily so. My suggestion is that the Super F.H.A. categorize the mortgages it might refinance into, say, “high,” “medium” and “low” qualities and, based on its best guesses of fair market value, post initial buying prices for each type.

Then it should adjust those prices according to whether mortgage owners rush in to sell (meaning that the prices were set too high) or stay away (meaning that the prices were set too low). Thus can the government synthesize a market until a real one re-emerges.

Hmm… Last I checked, Alan, there already is a market for these mortgages.  And that market is telling us that these mortgages should fail.  So why is your ”synthetic” market preferable to the one that already exists?