Treasury Secretary Hank Paulson, searching for a way to ease the burgeoning mortgage crisis, is traveling down a dangerous road. He wants to let state and local governments use tax-exempt bonds to refinance some troubled home loans.

Muni bonds are no way to transfer money from the Treasury to local governments. They cost the feds about $30 billion-a-year in tax revenues, more than the issuers enjoy in savings from the tax-free interest rates.

Private purpose bonds, such as mortgage bonds, are even more trouble. They often either fund investments that would have been made anyway, or help bankroll unproductive deals. That's one reason why Congress has been trying to limit their use for decades.

In the late 1970s, mortgage bonds themselves became a vehicle for massive abuse. Rather than immediately distributing the funds, which were supposed to be targeted to first-time homebuyers, local governments invested the money, making a sweet profit on the difference between their tax-free borrowing costs and their returns. At the same time, investment bankers and local bond attorneys cashed in with huge fees.

By turning back to this troubled market, Paulson risks a return to those bad old days. Worse, he may be creating a whole new set of problems. Here are just a few:

1. The bonds will probably help the wrong people. Borrowers whose loans are already underwater and are high default risks won't be helped because the bonds will be secured with mortgage payments. The tax-subsidized loans might help some whose credit is OK but can't refinance in the tight mortgage market. But it is more likely that much of the money will go to borrowers who could refinance on their own. The Boston Fed estimates that about half of subprime adjustable rate mortgage bowers have not yet missed payments.
   
2. The plan turns mortgage bonds on their head. They were targeted to first-time homebuyers. Left alone, the ongoing housing correction would drive down prices and help those who prudently waited until homes were more affordable. But bond-backed refinancings will only prop up prices, rewarding overextended owners and greedy lenders, and hurting those who are new to the market.
   
3. Even before Treasury rolled out its plan, state housing agencies and bond dealers were trying to get the state volume caps on the bonds lifted. If they succeed, there isn't much doubt that issuers will return once again to the days of lending to inappropriate borrowers.
   
4. These bonds will be a honey pot for investment bankers, many of whom aided and abetted the mortgage crisis in the first place. Now, they'll earn new fees on the tax-free bonds that are intended to help undo the mess they created.

Paulson is in a tough spot. The mortgage mess appears to be worsening and the Bush Administration is under pressure to do something. The Treasury Secretary is on the right track by modernizing the Federal Housing Administration and convincing loan servicers to improve the refinancing process. But mortgage bonds are not the answer.