Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s Wall Street Weekly. 

Here’s a shocker: Sen. McCain may have it right. While Paulson and Bernanke are scurrying about trying to keep our financial institutions afloat, the ongoing source of the rot — the mortgage debacle — has basically been left untouched. It’s like fussing over lifeboats while water gushes through the gaping hole in the hull. 

Mr. McCain proposed in last night’s debate a $300-billion plan under which the government would buy up mortgages gone sour and allow the borrowers to refinance at an affordable rate. I imagine that the $300 billion total was a figure plucked out of the air – but in this season of instant mega-deals there’s nothing new in that. It may well be that the cure for what ails us starts where the disease took hold – in the housing sector.

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Today’s downward spiral in financial markets echoes the collapse in the housing market. The pattern is by now all too familiar. Someone defaults on their mortgage, the property goes into foreclosure, the house is thrown onto an already-glutted market and prices drift lower. Because easy credit led to stupid lending terms, homeowners see the value of their house sink below the amount they owe on their mortgage. They realize that paying off their mortgage is not an economically prudent thing to do, so they walk away, default, and the whole cycle worsens.

Those defunct mortgages then poison securities that were built on the credits, which undermine even more towering structures of debt, which then eventually bankrupt Lehman, Fannie, Freddie and all the other institutions that bought them. It’s a sorry mess, for sure.

Our financial gurus have taken unprecedented measures to contain the damage done to the banking system and to the economy, but Paulson and Bernanke have always been one step behind. That’s because they have not tackled the underlying problem. Had they turned $700 billion towards buying up and refinancing defunct mortgages a year ago, I am convinced we would never have come to this scary place. Instead, panic reigns around the world.

What really could be done to repair the mortgage market? First, a couple of numbers put this issue in perspective. As the head of Annaly Capital wrote in his monthly commentary released yesterday, "Subprime mortgages as a whole only total approximately $1 trillion or 8% to 10% of all mortgages outstanding – and of that only about 25% or so may ultimately default – and direct housing and housing-related jobs account for only a small fraction of the U.S. economy."

Of course, because of the cascading effect of the deteriorating housing market described earlier, the problems are no longer contained in the subprime sector. Even homeowners with good credit are defaulting on their mortgages – something that has never happened before.

However, if the government took the tack outlined in Sen. McCain’s proposal of helping only those who actually inhabit their homes, and who made their purchases with an honest loan application and a down payment, many of the subprime mortgages held by speculators would not qualify.

This approach will not stem the coming recession, but it might begin to shore up families struggling to keep their homes. In turn, Americans might begin to see a way forward. Helping hundreds of thousands of homeowners all across the country would bring government assistance down to ground level. One of the things clearly pressing financial markets lower has been the total and complete loss of faith in our leadership, on both sides of the aisle. All this money pouring out of the Treasury is slated to be spent in invisible ways. Who knows what Citigroup’s CDOs are worth? I don’t, and it’s pretty clear that the CEO of Citigroup doesn’t, either. Will the Treasury agents have any better idea? It’s not reassuring to most Americans that their hard-earned tax money is headed into the muck.

At the least, I’ll feel good about the government bailing out the family next door. I can see it, and it’s real.