Just a few days after the markets seemed primed for a crash, the quick action of the Federal Reserve to salvage the mortgage market appears to have stabilized the system. It took a $200 billion lending pool and a fire sale at Bear Stearns, but investors have climbed back into the mortgage bond market. Analysts have begun breathing again, but warn that the crisis has not yet passed:

The Federal Reserve’s latest dose of medicine to calm the credit crunch appears to be working in at least the all-important mortgage-bond market where yields have dropped in recent days.

“Every little bit of support in the mortgage market helps every other single market out there,” said Jim Vogel, head of agency debt research at securities firm FTN Financial. “The Fed, by a combination of actions, is giving people more assurance that things are better for now.”

The sigh of relief in the $4.1 trillion market for bonds guaranteed by Fannie Mae and Freddie Mac came even as investors in other fixed-income markets, stocks and commodities grew negative yesterday following the euphoria over Tuesday’s 0.75 percentage point cut in short-term interest rates by the Fed. Ultimately, though, the mortgage market has broad impact on the economy and other markets, so any improvement there could bring relief to other markets as well. Of course, the good news doesn’t mean the financial crisis is over. The mortgage-market calm is fragile and could easily be undone if, say, default rates again lurch higher, another high-profile financial firm fails or more multibillion-dollar write-downs force banks to curtail lending further and seek emergency capital. “There is no such thing as an all-clear siren at the moment,” Mr. Vogel said. “It’s too soon to say, ‘Dismantle your bomb shelter.'”

The markets have kept their heads around the world. On Monday, they took hits in most global markets, but by yesterday most of the losses had been absorbed. At least one major fund manager, Bill Gross, announced that he had resumed buying mortgage bonds with the guarantees from the Fed and Treasury now in place.

However, the crisis remains as the root cause has not yet been resolved. Lenders wrote a lot of bad paper and the lack of equity still exists on those loans. Until housing prices rise again, borrowers who took out unrealistic ARMs will find making the new rates workable or refinancing possible without a large infusion of cash to make up the loss in equity. There will be less pressure on lenders to foreclose, but defaults will continue.

How will the Fed and the Treasury deal with this structural problem in the mortgage markets? Congress and the White House will probably determine a system to identify actual homeowners from speculators and devise some sort of relief package. Politically, it makes more sense, and in a way it addresses the core problem more than simply providing guarantees for the lenders who created the problem by overselling credit. Speculators and flippers heightened the risk and gambled knowing the consequences of failure.

Is that the right thing to do? As William Polley told us on Monday on our podcast, extreme crises sometimes require intervention. However, it does make it more difficult for free-market advocates to argue against statism in economics. In an election year, however, people win re-election by taking action, not by standing around watching events unfold. Expect more intervention throughout the year.