If Hank Paulson had not already lost all his hair, he would surely be tearing it out right now.

The treasury secretary must have thought saving Fannie Mae and Freddie Mac, the government-sponsored housing enterprises, would restore confidence to the financial system. But the stock market rally lasted just one day before investors switched their worries to Lehman Brothers, the struggling investment bank.

Paulson should get some credit for his rescue. The businesses had to be propped up to avoid chaos in the housing market; Fannie and Freddie have been providing around 80 percent of U.S. mortgages this year.

By taking the lead, the Treasury took the pressure off the Federal Reserve. The "conservatorship" structure has ensured that the chief executives went and the shareholders suffered.

Inevitably, bondholders (which include foreign central banks) have been protected; the government had promised as much and a debtor nation could not afford to antagonize its lenders.

Stock markets at first welcomed the deal. The meltdown of Fannie and Freddie would almost certainly have led to financial chaos. By lowering the funding costs of the two agencies, the rescue should also bring down mortgage rates for hard-pressed householders.

Although the plan has forestalled Armageddon in the housing market, it is no cure-all. There are some signs of stability, but too many homes are for sale and defaults are rising fast.

More than 9 percent of all single-family homeowners with mortgages are now a month in arrears or facing foreclosure. House prices may well fall further.

In any case, the credit crunch is no longer just about American housing. In Britain, Spain and Ireland, house prices are falling. Defaults are rising across a range of debt classes from commercial property through corporate bonds to consumer loans.

With unemployment rising in America and economic weakness ever more pronounced in Europe and Japan, economists are arguing about what counts as a recession.

The credit crunch had its origins in finance. But the banking industry and the economy are now locked in a kind of negative symbiosis, where bad news in one induces pain in the other.

Defaults cause bankers to restrict the availability of credit, which causes more defaults. And so the malaise spreads.

The next test of the system is already here. Banks have spent the past year shoring up their balance sheets, but — after some big losses — investors have lost their appetite for more share issues.

Shares in Lehman Brothers have plunged as the investment bank tried, without success, to find an outside investor, leading the company to bring forward its results and its own emergency plan.

If that fails, will the government be forced, as with Bear Stearns, to engineer a takeover by a rival?