Bailout watch: Washington works in mysterious ways

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Funny thing about government policy: Sometimes big changes happen with little public debate and no warning -- for example, the decision by Congress to lift conforming loan limits by $300,000 to help high-cost housing markets like California, quite possibly at the expense of other markets. You would think a momentous decision like that -- opposed by regulators, quite likely to mean higher interest rates for some borrowers -- would generate an old-fashioned debate in Washington. You would be mistaken.

My hunch is that a massive federal bailout of banks and lenders could happen the same way -- without much public debate or discussion, one day word leaks of secret, high-level negotiations, and pretty soon Treasury Secretary Henry M. Paulson Jr. (pictured) is standing in front of an imposing government building and announcing a wonderful new arrangement to refinance America’s mortgage debt. As if it belongs to all of us. The president later grunts his approval while scooting toward a helicopter. ‘’Ain’t a bailout,’ he says, shaking his head and wagging his finger, ‘It’s a refi, a refinancing.’

All this is a preface to another serious call for a widespread bailout, on the influential (still) op-ed page of the New York Times. Banker Howard P. Milstein encourages a bailout of the entire sub-prime mortgage industry, writing, ‘If banks of all sizes could regain their capital immediately and easily, it would be a tremendous benefit to the American economy.

‘The federal government could make this happen by entering into an arrangement with American banks that hold subprime mortgages, in which homeowners typically pay a low interest rate for two or three years then face much higher payments. Here’s how it would work: The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their “teaser” interest rates on those loans in effect for the entire 15 years.’

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