PORT WASHINGTON, N.Y. (MarketWatch) -- What's plaguing the financial markets these days is not a lack of liquidity but a lack of confidence and this won't be restored unless and until policymakers address its root cause: falling home prices.

As I have said many times before, policymakers are treating the symptoms when instead they should be trying to cure the disease.

The Federal Reserve's offer to swap Treasury securities for certain types of mortgage-backed securities (MBS) is the latest example.

This arrangement may temporarily boost prices of these MBSs by taking some of the supply off the market, but it won't last for two reasons: (1) the central bank plans to hold these securities for only 28 days and (2) the home values that form the basis for these securities are still declining.

Until home prices stop falling, MBS values won't stabilize. And until MBS values do stabilize, lenders will continue to be wary since they will remain unsure of this and just about every other form of collateral save for the safest Treasuries.

To stabilize home prices, I suggested in my column of Feb. 4 that the government step in and split the difference between prices sellers are charging and those that buyers are willing to pay. See related column.

While the notion of stabilizing home prices has been accepted, my suggestion has been criticized for a number of reasons. Either it was misunderstood, was viewed as unattractive politically, or was seen as a bailout for sellers.

To address these issues, I have come up with another idea. Washington should form an agency akin to the Home Owners' Loan Corporation of the 1930s, an agency that refinanced homes during the Great Depression in an effort to prevent foreclosures.

While some people were able to hang onto their homes, many defaulted and the HOLC wound up owning these homes. However, it sold them and by the time this agency closed its doors in the early 1950s, it actually returned a small profit to the government.

I envision HOLC II offering to buy all houses for sale at a price not more than three times the median household income in each market. It would then offer to sell these homes to prospective buyers.

This could not be construed as a bailout, since many sellers would take a loss -- how much depending on when they bought and how overheated their particular market became.

Also, it would not rescue homeowners who bought more house than they should have or took out one home-equity loan too many and are now "upside down" (they owe more than their house is worth).

But by returning home prices to a more normal ratio relative to incomes, it would make housing affordable once again. This would get buyers back into the game, but even more important, it would establish a basis for valuing the plethora of mortgage-backed securities that have permeated the financial markets.

The markets might be able to do this on their own, but as we saw this week, it could be painful -- not to say prolonged -- and it runs the risk of overshooting.

For this gambit to work, HOLC II would not have to buy every house that's up for sale. Indeed, its very offer to buy might be sufficient to end housing's downward spiral -- even with the large number of unsold homes still overhanging the market.

And if the lower price this agency does offer causes demand to exceed supply, HOLC II, like its predecessor, might even be able to make a profit for the government.

Who says history doesn't repeat itself?