SOME OF THE nation's top economists figure the government's response to Fannie Mae and Freddie Mac has come to a critical turning point: They expect Treasury will be forced to inject funds into the two firms, but they're not sure whether pulling the trigger will be enough to bolster the sagging economy.

The woes of the two mortgage-lending giants were the talk of the Federal Reserve Bank of Kansas City's annual mountainside conference here in Jackson Hole, Wyo. When the central bankers, academics and Wall Street economists met a year ago, the housing-market troubles had just begun to deepen global-credit problems.

Since then, government officials around the world have repeatedly intervened by injecting liquidity into markets. Their actions may have prevented a much deeper financial meltdown, but they haven't ended the crisis.

The fundamental problem: Home prices continue to decline sharply. That is leading to more homeowner defaults and foreclosures, which further knock down real-estate values. The price declines are hitting banks that hold mortgage-related securities, ultimately restraining credit and slowing the overall economy.

"It's simply not clear -- at least not clear to me -- what will stop this self-reinforcing process," Harvard economist Martin Feldstein told conference participants.

In the U.S., the Fed created or expanded lending programs to financial firms and engineered a controversial rescue of the investment bank Bear Stearns. The Fed also cut its short-term interest-rate target sharply over the past year, to 2% from 5.25%. Even so, mortgage rates are now higher than they were a year ago.

WITH THE FED low on ammunition, Congress and the Treasury will have to carry more of the burden, many conference goers said.

"The primary focus to date has been on the provision of liquidity" by lending to financial institutions, former Treasury Secretary Lawrence Summers said in an interview. "The measures that affect capital -- either by supporting asset values, injecting public funds or strengthening economic performance -- are increasingly important for the future."

Although Fannie and Freddie weren't the subject of the formal discussions at the conference, their future was the subject of much hallway and dinner discussion. Fed officials acknowledged what other economists around them believed -- that the lending giants needed public funds as well as private ones.

"They've already gone too far to the edge of the cliff," said Allan Meltzer, a Carnegie Mellon University economist.

With their stock prices continuing to decline, Fannie and Freddie face increasing difficulty raising capital from private sources. The market's expectation that a government injection of funds would wipe out existing shareholders is pressuring their stock prices even further.

That leaves Treasury Secretary Henry Paulson with lousy options. He won congressional approval last month to support the firms through credit lines or by injecting capital. The firms are wary of such aid, though, because at the very least it would signal that they are at the end of their rope. Treasury action may also involve a form of nationalization, which wipes out shareholders entirely.

The companies argue that they can meet regulatory requirements and won't need the government cash. So long as they can roll over their debt, they pose less risk of destabilizing broader financial markets. But that's a minimalist outcome. Under that scenario, they wouldn't have much ability to support the mortgage market -- their reason for existence -- by buying up mortgages and freeing up lenders to make more loans.

IF THE GOVERNMENT invested heavily in the two mortgage companies, they might be able to bring mortgage rates down. But the government doesn't want to turn on the spigot, which could turn into a flood of red ink. That's because Fannie and Freddie, which own or guarantee half the nation's mortgages, continue to face losses on their mortgage portfolios as house prices decline.

Remaking the companies would be tough political slogging, too. They are both chartered by Congress, which is itching to cut short its session so members can campaign. Plus, a new president may want to take a fresh look at the problem.

"Some form of intervention is going to be very difficult to avoid," said Lewis Alexander, chief economist at Citigroup. "There aren't easy options from here, but the one that supports the mortgage market is going to override."

Even without the mortgage problems, the economy faces tough times. Consumer spending is expected to remain under pressure as the job market weakens and higher energy prices sap incomes. Growth in exports, which has helped to underpin what meager growth there has been, could diminish with the strengthening dollar and a slowing global economy.

"The crisis has now spread to the real economy, and who knows what will happen as a result," said Bank of Israel Gov. Stanley Fischer, a former top official at the International Monetary Fund and Citigroup. "The crystal ball at this stage is unusually unclear."

This much is coming into focus: The economy's wounds caused by the housing crisis probably won't be healed completely by the time central bankers gather here again next year.

Write to Sudeep Reddy at sudeep.reddy@wsj.com

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