The National Association of Realtors reported January existing home sales sank to 4.890 million from 6.380 million a year earlier, and the average price was $201,100, down from $210,900 or 4.6, percent from a year earlier. In December, sales were 4.910 million and the median price was $207,000. The large price drop from December was particularly disturbing.

These numbers were hardly surprising. The National Association of Realtors tracking statistics for new sales contracts have been sinking precipitously in recent months. Buyers are scared, and recent actions by the Federal Reserve, the Bush administration or the Congress offer little hope for better times soon.

The U.S. consumer faces a constant drumbeat of bad news. Housing prices are falling, gas prices are rising, good new jobs are getting scarcer than hen's teeth, and credit card terms are getting tougher, even as the Federal Reserve makes credit to banks cheaper.

Federal Reserve efforts to increase liquidity and bank lending have not made mortgages adequately more available, especially in the Alt-A and subprime categories. Alt-A loans are for homeowners offering good repayment prospects but either less-than-perfect credit or recent income records. Fannie Mae, generally, only takes prime lenders, and does not finance most upper-end, more-expensive homes.

Ben Bernanke’s strategy has two components. The Fed has lowered short-term interest rates by slashing the Federal Funds rate 1.25 percentage points since January 22, and the Fed has permitted banks to use subprime-backed mortgage securities to borrow from the Federal Reserve. The latter is the so-called term auction facility.

These policies do not solve the basic problem, because these policies do not provide banks with opportunities to write many new non-Fannie Mae conforming mortgages.

Banks cannot provide the housing market with adequate amounts of mortgage finance by taking deposits, writing mortgages and keeping those mortgages on their portfolios. Bank deposits are not nearly enough to carry the U.S. housing market. Much the same applies for loans to businesses.

In normal times, regional banks bundle mortgages into bonds, so-called collateralized debt obligations (CDOs), and sell these in the bond market through the large Wall Street banks.

The recent subprime crisis revealed the large banks were not creating legitimate bonds. Instead, they sliced and diced loans into incomprehensibly complex derivatives, and then sold, bought, resold, and insured those contraptions to generate fat fees and million dollar bonuses for bank executives.

This alchemy discovered, insurance companies, mutual funds and other private investors will no longer buy mortgage-backed bonds. Banks can no longer repackage mortgages and other loans into bonds and are pulling back lending.

Home prices tank, consumers spend less, businesses fail, and jobs disappear.

Private investors have taken massive losses, and the large banks have taken about $150 billion in losses on their books. This left the banks short of capital and in liquidity crises. The banks turned to foreign governments, through sovereign investment funds, to sell new shares and raise fresh capital, and to the Fed to boost liquidity.

Neither the sovereign investment funds nor Ben Bernanke have required the banks to change their business models, which essentially pays bankers for creating arcane investment vehicles that generate transactions fees, rather than writing sound mortgages and selling simple, understandable mortgage-backed securities to investors

Without those changes in business practices, the bond market remains closed to mortgage finance, other than CDOs offered by Fannie Mae, and it is inadequate to supply the volume and array of mortgage products necessary to support a full housing recovery.

The economic stimulus package tax rebates, interest rate cuts and administration help for distressed homeowners are palliatives. The $168 billion stimulus package is less than the losses taken by private investors and the banks on CDOs

Getting the housing market going and the economy growing will require Ben Bernanke to aggressively pursue banking reform. Without genuine changes in the way Wall Street handles mortgages, the economy can’t get back on track.