Mortgage rates spiked to 6.75 percent on Wednesday, only today sliding back into the 6.5 percent range (these rates with no loan fees). There is good reason to expect rates to fall back, and maybe a long way, but only in the context of effective intervention by federal authorities.

There is no sign of such intervention at the moment. However, developments soon ahead will attract the attention of officials preoccupied with market solutions, ordinary monetary operations, opposition to any form of "bailout," wishful thinking, denial, or the view from any of several ivory towers.

This week marked the transition from a relatively orderly seven-month repricing of credit and reduction of leverage to fire sale — just plain panicked dumping. The Fed’s number one responsibility is orderly markets. Beyond inflation or economic growth or any other objective, orderly markets come first: Prevent at any cost a disorderly liquidation that leads to chain-reaction systemic failure.

The Fed has failed. As have the Treasury, Congress and the White House.

The spread between government-guaranteed (or effectively so) mortgage-backed securities and 10-year Treasurys reached an all-time, utterly non-economic 3 percent. The spread between AAA-rated municipal bonds and Treasurys is out of line by 2 percent. These and other credit markets this week for the most part ceased to function, the capital in the banking system effectively exhausted. Scott Simon of bond-giant Pimco, a calm sort whose remarks are usually limited to time and temperature, said, "Everything is telling you that the financial system is broken."

The good news: I have believed since August that we would get to this place, and then obvious danger would overcome bailout resistance in both parties and the public. A financial accident would wake us up before grave damage would be done to the economy. We have all the tools crafted in the Depression, and in banking crises large and small since. These tools will work, and fast. A fire sale is a collapse of confidence, nothing-to-fear-but-fear-itself; confidence can be restored as fast as it left.


***


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