Early holiday present: Subprime package seen likely

Paulson will address a housing conference on December 3. The Treasury secretary led a one-hour meeting Thursday at the U.S. Treasury Department in Washington with federal regulators, bankers and lobbyists. Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and Washington Mutual (NYSE: WM), executives attended, said a person present, who spoke on condition of anonymity, Bloomberg News reported.

Economic Analysis: Place this one under the category of "We'll believe it when we see it." If it comes to fruition, this would be, arguably, the best Christmas and Hanukkah present the U.S. economy and subprime mortgage borrowers could receive. Currently, lenders face the prospect of seeing many subprime loans default or seeing fewer subprime loans default. Free-market purists will argue that the Treasury should not broker or intervene in private mortgage markets. As a rejoinder, Treasury plan supporters can argue that the Treasury is not imposing a solution on any organization: ultimately it's up to the lenders to determine if it's in their interest to negotiate or let many of these subprime loans go bad.

But let no one conclude incorrectly: the Treasury's plan will not jump-start the housing sector -- far from it. The housing sector recovery will take several years. The Treasury plan will, however, help stem the spiral of defaults-leading-to-lower-housing-prices-leading-to-more-defaults -- a vicious cycle that has to be broken before any meaningful housing recovery can occur. If the Treasury's plan can achieve that, it will represent a step forward for the U.S. economy, for lenders, and for homeowners.