By John Cranford, CQ Columnist

It’s becoming evident that Treasury Secretary Henry M. Paulson Jr. has conceded defeat in his battle to repair the U.S. economy and to mitigate the global financial crisis. That’s truly frightening.

The core problems with the economy — slumping home prices and the related collapse of the housing finance system — have proved too difficult to resolve with a bailout, no matter how costly. Paulson doesn’t agree with this harsh assessment, of course. But it’s hard to conclude otherwise. What he says has been an evolution in thinking about the way to manage the crisis looks more like a punt.

And what was a confident proposal to isolate the mortgage crisis, so that the problems in the broader economy could be addressed, is gone, left to the Obama administration to figure out.

Six weeks ago, Paulson was convincing in his arguments to Congress that $700 billion could successfully be used to take effectively worthless mortgage-backed securities off the books of troubled banks. By spending the equivalent of a quarter of the taxes the federal government collects in a year’s time, the Treasury would help the marketplace determine a fair price for these toxic assets and unclog credit markets.

Last week, he acknowledged what had been clear almost from the start: The asset purchase plan wouldn’t work. There wasn’t nearly enough money, and the problem was intractable — none of the holders of these worthless securities were going to play ball and sell them at a sufficient loss. Greed prevails even today.

So, after committing $250 billion of the bailout money instead to the Treasury’s purchase of stock in (mostly) still-healthy banks to shore up their balance sheets and using $40 billion to restructure and enlarge the bailout of insurance giant American International Group Inc., Paulson called it quits.

To make clear the accounting: About $60 billion remains of the bailout’s first installment of $350 billion, and Paulson is hoarding that — apparently on the plausible assumption that it will be needed for an emergency infusion in a bank or two sometime before Jan. 20. But all that is just a patch. And while Paulson talked about unfreezing the consumer loan market, that looks like a subterfuge. He’s not even going to ask for the second installment, because he has no idea how he would use it. It would appear he doesn’t want to confess that fact to lawmakers, at least not in public.

And although the extra $40 billion for AIG bought what must be some of the ugliest mortgage-related securities on the planet, there will be no additional purchases of mortgage assets. That may be the biggest shame of all, because until those assets are purged — at a significant loss to the idiots who bought them — the disease will merely fester and grow.

In an interview with Bloomberg Television on Nov. 13, Paulson tried to put the best face on what has happened. “What changed was our understanding of the magnitude of the problem,” he said, acting as if he were still actively trying to manage the bailout.

Whistling Past the Graveyard

None of this outcome suggests that Paulson didn’t try. Or that his compatriot in this endeavor, Federal Reserve Chairman Ben S. Bernanke , hasn’t done what he can to restore sanity to financial markets. The Fed has committed upward of $1 trillion to a host of special lending “facilities” designed to keep credit moving in the U.S. and global economies.

There is even evidence of success: Some interest rates have come down, and some companies are able to sell short-term commercial paper — the sort of debt that in the not-too-distant past provided the cash that is the lifeblood of commerce.

That market had clotted so badly that companies were afraid they couldn’t pay their suppliers or workers, and the central bank was right to become the buyer of last resort. Unfortunately, the Fed’s actions haven’t really eliminated the constriction that tied up the commercial paper market. The Fed now is the market.