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How bad will credit crunch get?

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One perversely pleasant sign in this deepening credit panic: on Friday, frightened investors began to buy top-quality mortgages as fast as Treasurys, and the lowest-fee 30-year loans fell toward 6.5 percent. In the prior two weeks, the failure of mortgage yields to follow Treasurys was worrisome for three reasons: it looked as though all mortgages had become toxic; second, a hallmark of a really bad credit crunch is a lock-up extending to AAA paper (which Fannies and Freddies certainly are); and lower fixed rates are crucial to offset the very rapid re-pricing and/or outright removal of Alt-A and subprime credit. In the big load of July economic data last week, the important stuff arrived softer than forecast: payrolls, unemployment, autos, the twin surveys by the purchasing managers' association, and factory orders. Softer, but within the range of the last year, and of themselves no reason for the Fed to contemplate a rate ease. However, by the end of an ugly week, as credit distress ...