Mortgages struggled to stay as low as 5.75 percent (more below on the stubborn refusal of mortgages to follow the Fed down).

The biggest news of the week: the off-the-table January ISM survey (the ineptly renamed purchasing managers’ association), one of the very best real-time indicators, the 54-to-41 plunge the worst monthly result ever. A general intake of breath followed, not yet released. January retail sales were the worst in five years; credit cards declined in use and increased in distress; and Wal-Mart reported, sadly, that shoppers are using holiday gift cards to buy necessities — diapers, pasta sauce, and detergent.

The only questions remaining: how deep and how long the recession?

This one is different in pattern from others (save perhaps ’91-’92 affair, a micro-mini crunch). By summer ’07 consumers were stressed by energy and housing, but the economy was still rolling along when the August Crunch began to tip it over. Standard recessions are consumer-first, then financial and credit trouble; this is vice-versa. Caught by atypical surprise, policymakers have floundered and flinched.

The problem: the August revelation of some $4 trillion in troubled assets. They had accumulated for years under the pretense of performance, but deteriorated steadily since ’05. Each banker knew his own trouble, and in flash chain reaction each stopped dealing with his peers for fear that they were in as bad shape as he. Crunch.

That crunch was symptom, not cause. Since August we have been in an episode of “House”: While the Fed medicated the interbank symptom, the actual disease worsened, the crunch broadened, the economy deteriorated, and new symptoms forced the Fed into an undignified rate cut. Four times the Fed has cycled this way, patient sinking.

I would very much like to be proven wrong, but the word is “bailout”: Extract the rot from the system and put it into a nouveau RTC. Then markets can function.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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