The drop in altitude occurred because of MCAS activations retrimming the plane into a dive. MCAS is only active during flaps retracted flight regimes.
They couldn't redeploy the flaps to shutdown MCAS because
A) they didn't know it would work, and it was not documented in any standard procedure
B) the plane was travelling too fast for safe flap deployment
C)Flap deployment decreases the critical AoA of the wing, meaning that pilots would have to be extremely careful during the recovery, and may in fact not have been able to pull out fast enough even if they fixed the mistrim.
Also, remember that a plane flying straight at the ground is still making lift as it barrels toward the earth. Lift isn't something magic that guarantees the plane stays away from the ground. The force vector will happily accelerate you 90° relative to your lifting surface's velocity vector through the fluid.
If for whatever reason you decide that that vector should no longer be parallel to the surface... Well... That's on you.
Or in this case, a computer programmed with an insufficiently robust algorithm for safely doing what it was actually meant to do. As the flight computer had no way of understanding that what its AoA sensor was telling it could possibly be wrong, and therefore alerting the pilots that they were flying on their own now.
So while the pilots knew what they wanted, the computer, not being programmed with the possibility of being wrong in mind, did exactly as it was designed to do.
And this, ladies and gentlemen, is how you kill 300 people without realizing that you're doing it.