Mortgage and Treasury rates have stayed within a tight range for six-straight weeks: 5.875 percent to 6.25 percent and 3.7 percent to 3.92 percent, respectively.

Given the lurching in other markets, the credit market stability may seem other-worldly, but it is not — recent bond trading accurately reflects the current economy. We are still stumbling forward, avoiding one open manhole after another. The cardinal indicator: The labor market is still intact; there are no waves of layoffs; and new claims for unemployment insurance are just as steady as interest rates. The Fed knocked 1 percent off its prior GDP forecast, down to a range of 0.3 percent-1.2 percent for the remainder of 2008.

The unprecedented mix of oil, inflation risk, housing recession, credit crunch and explosive growth overseas has turned normal economic discussion — the search for centerline probability — into a freak show.

Back to the center, here, in three parts beginning with oil. Markets have had it right since oil first jumped the forty-buck fence in 2004: Price increases will slow the U.S. economy, and that slowing will cancel the inflation threat. In the ’73-’74 and ’78-’81 spikes the U.S. immediately went to wage-price spiral, inflation each time to 11.8 percent; in ’90-’91 only to 5.5 percent. No spiral this time: Foreign competition has capped wages, and as in ’90-’91 the Fed has kept clamps on money.

This oil spike is not as damaging as the ’73-’74 run from $3/bbl to $12/bbl, nor the ’78-’81 trebling from $14 to $38. Oil has tripled this time, too, but new GDP today requires less than half the energy as then, and we are vastly wealthier — that vast increase, of course, is the main reason that oil is up so far. We can afford to pay, as can overseas competitors that we have never had before.

To those who protest in pain: Go find an old person and ask what it was like, twice in one 10-year span to wait in a mile-long line, pushing your car to be able to buy the 5-gallon limit. Have a look at the tattered, 35-year-old solar panels on tract homes. Ask where those carpools went, and why HOV lanes require only two bodies.

Then inflation. This week’s worst contribution came from Bill Gross, Poobah and Oracle of PIMCO. He announced (again) that U.S. CPI numbers are fraudulent, and he is certain because inflation is high in other countries and so must be here. Beware of irresponsible twaddle from those who should be leading. His trump card: The 30 percent drop in the dollar must be the result of inflation. It is not, of course: It is the result of hosing $650 billion overseas in our annual excess of imports over exports.

The Fed is playing a very dangerous game exceptionally well. Inflation is under control here because the Fed is allowing the crunch, oil and housing effects to slow the economy, refusing to print money, and allowing us to suffer the consequences of unspeakably stupid public policies. If the economy slips into real recession, this Fed looks tough enough to let us find our own way out, and not try to print us out.

Housing. Center! Any home-price report containing the words "average," "median," "Case-Shiller" or "Zillow" without qualification is an intentional effort to mislead. Hysteria sells. The national home market has shifted its mix of sales to lower-price ranges, and the portion of distressed sales has increased (1.45 million foreclosures will do that), thus each of the approaches above overstates the decline in prices.

However, the brand-new OFHEO data for Q1 ’08, appraisal-based and weighted-average, is disturbing. Its state-by-state listing (p. 19-20, HPI) for the first time shows a nationwide stall. Only two states (Colorado and Indiana) enjoyed as much as 1 percent appreciation in the quarter. Only six states had price declines of 1 percent or more, but to have the whole USA go flat … that’s fragile.

Causes include slowdown and energy-crimped budgets, and certainly overshot prices in the Bubble Zones, but I think the unifying downward force is the inadequate and still shrinking supply of mortgage credit. There are noninflationary fixes for that problem, all eluding policymakers for 10 months. We are running out of time.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

***

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