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An article in last week’s Slate ponders this very notion, which is especially relevant now that the U.S. Government finds itself perhaps the largest nationwide investor in distressed assets.

Those in favor of the government bailout contend that these distressed assets, primarily in the housing sector, are still quite valuable.  They feel that what inhibits investors from snapping them up (some investors that is, others are not shy at all) is the fact that loans are now harder to get.

But how to determine the worth of a distressed asset?

According to University of Rochester professor Mark Bils, an auction scheme that Harvard professor Michael Kremer created would effectively determine a distressed asset’s worth.  Essentially, it works like this: place ten similar distressed assets on the auction block.  When the auction is complete, the Treasury buys the successful bids for nine of them, while the tenth property goes to the successful bidder.

What’s nice about this auction is that it’s the Treasury that buys the assets and recapitalizes the firms who have these assets, and it pays what the individual winning bidder considers them to be worth.  The Treasury is funding ninety percent of the deal, while private investors are setting ten-tenths of the price.  Since the individual bidders are motivated to bid responsibly, it’s a good bet that the prices will be fair.

Given the understandable amount of investor skittishness right now, this is a pretty good idea, since it would result in reasonable bids and would enable private and government investors to work together.