Mortgage rates improved again this week, slightly, to 6.375 percent and the 10-year T-note trading often just under 3.8 percent, a resistance level since spring. The improvement anticipates a weakening economy, but a further decline in rates will depend on the fact of weakness. A test comes quickly, in the first August data due next week.

This week’s data had more headline than authentic strength, but there was some: In the second quarter export sales rocketed 13.9 percent, the long-delayed benefit of a weaker dollar. Exchange-rate cycles and their effects tend to be very long-wave, several-year affairs: Even though the dollar has begun a turn to sensible levels, and foreign economies are entering slowdowns that will reduce their appetite for our exports, our export sales will help our economy for quite a while.

Overall gross domestic product popped 3.3 percent in the second quarter, but undermeasured inflation made the GDP leap rather like the guy in the falling elevator who hoped to save himself by jumping just before hitting bottom. "Nominal" GDP rose 4.6 percent, adjusted to "real," non-inflated dollars by subtracting the 1.3 percent inflation "deflator." The deflator, usually an excellent measure, is way too low right now: Actual overall inflation ran close to 5 percent in the second quarter, and real GDP thus was negative, as it was in the first quarter.

July data showed the rebate-check fade: personal income dropped 0.7 percent, and spending rose a slim 0.2 percent. Weekly unemployment filings slid from a new peak early in August, from 450,000 to 425,000, but the overall trend is not good.

July sales of new and existing homes appeared stable but were not. New-home sales are measured by contracts written, and fallout is staggering: at least one-third. The leading cause: Buyers can’t sell the homes they have. Resales are holding roughly 4.9 million annual, down from the 7 million peak. However, at the peak, "involuntary" sales were negligible — today they are almost one-third of the total, compressing "voluntaries" down perhaps 60 percent from peak.

Case-Shiller continues its hysterical mismeasurement, insisting that home prices fell 15.9 percent in the last year. The excellent www.ofheo.gov data has national prices down 4.8 percent — nothing that bad since the 1930s. The foreclosure and walkaway damage is obvious. The silent corrosion is in the millions of households unable to sell or to refi off of bad-idea ARMs, and in diminished household faith in the future.

A way to pass time in the 13-month run of the Crunch has been to ask, "Do they get it?" "They" being the authorities; "it" being the insolvency of the financial system.

They do. Worth your time: www.federalreserve.gov, the minutes of the Aug. 5 meeting. Unusually short, clear and grim, two things stand out: They get the risk of credit-default spiral (shrinking credit, more defaults, less credit …), and that risk is greater than inflation. The FDIC sure as hell gets it, staring at a bank/collateral spiral.

New game: What will they do about it? Treasury’s Henry Paulson was a daily fixture on the tube in July, appearing impatient with too much attention paid to spilled milk. All through August, Hank has been the soul of patience and completely invisible.

Nobody knows what the White House gets, but Paulson’s inactivity looks like somebody has told him to cool it. Maybe through McCain’s nomination, maybe through the election, maybe all the way to the "Escape to Crawford."

Neither candidate has a word to say, which is understandable, as many money pros still don’t get the nature and magnitude of the problem. At nomination, which candidate would like to explain to the people these choices ahead: If we guarantee Fannie and Freddie, what parts — stock, bonds, preferred, subordinated? Then, which banks do we save, and their parts? If we save rich financial guys, what of Ford, Chrysler, GM, and their retirees? What of the impulse to save homeowners, no matter how foolish, no matter how terribly unfair to the prudent but unlucky?

Not one of the four nominees has financial-market experience or evident knowledge. Better not to talk. However, election-cycle paralysis may be overtaken by events.

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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