Long-term rates are rising today, the all-important 10-year Treasury suddenly above the 3.16-3.28 percent range that gave us sub-5 percent mortgages for the first time since spring. Gone now, pushing 5.125 percent, the 10-year trading 3.37 percent at this moment.

Ordinarily, a range breakout like this would signal a run to the top of the old range, 10-year Treasurys testing 4 percent as in summer, mortgages at 5.75 percent. However, nothing in this moment is ordinary — not remotely predictable with normal tools.

Long-term rates are rising today, the all-important 10-year Treasury suddenly above the 3.16-3.28 percent range that gave us sub-5 percent mortgages for the first time since spring. Gone now, pushing 5.125 percent, the 10-year trading 3.37 percent at this moment.

Ordinarily, a range breakout like this would signal a run to the top of the old range, 10-year Treasurys testing 4 percent as in summer, mortgages at 5.75 percent. However, nothing in this moment is ordinary — not remotely predictable with normal tools.

In the short-run dynamics of supply and demand, the brief interval of sub-5 percent ignited refinance and purchase mortgage applications — up 18.2 percent and 13.2 percent, respectively, last week.

As there is no private investor demand for mortgages, once borrowers overshot the Fed’s constant purchase volume, rates had to rise to choke off applications. The surge in purchase applications was the first since spring, which says a "four" prefix is required to get housing going.

The devil is the long Treasury market: No matter how many mortgage-backed securities the Fed buys, if Treasury yields won’t stay down then neither will mortgage rates. The fate of long Treasurys depends entirely on the pace of economic recovery, and the recovery argument is descending farther into chaos.

I think these last two weeks are instructive: If you see a mortgage close to 5-percent-flat, just take it. A no-fee 4 percent is just good luck.

The central policy lessons from the Depression (which more resembled this episode than anything since): Don’t let your banking system collapse, and don’t try to balance your budget in the middle of a terrible economic contraction.

Today we have rival armies of analysts, salesmen and policymakers trying to apply the lessons of this episode before it is over, with hawks and punishers predominant.

The themes in their certainty: Stimulus is excessive, will cause inflation and imperil the dollar, and must be withdrawn soon; greedy bad guys caused all of this, and new regulation can’t be too tough; the nation needs a long-term process of deleveraging and must embrace frugality and saving; and too many resources have gone to housing and it must muddle its own way out. …CONTINUED

The leadership at the Fed is clearly more worried about downside risk. Vice-chair Donald Kohn delivered a wonderfully exasperated response to the hawks last week, joined by William C. Dudley at the New York Fed, Eric S. Rosengren in Boston, Janet L. Yellen in San Francisco, and the staff.

However, other regional-bank rock-heads (Thomas M. Hoenig, Jeffrey M. Lacker, James B. Bullard, Charles I. Plosser, Richard W. Fisher) have prevented thinking about "What if we haven’t done enough?" Federal Reserve Chairman Ben Bernanke has retreated into opaque Fed-speak, trying to hold consensus.

Larry Summers, National Economic Council Director, announced that a "new normal" of low gross domestic product growth was incorrect, and the economy could and would grow quickly.

Was that for political consumption, to make the unemployed and foreclosed feel better? If so, it was not worth it, as it immediately reinforced the hawks’ fears of a too-stimulative administration, and undercut bond investors’ faith in a slow-growth future.

Treasury Secretary Tim Geithner has disappeared. Citi’s management got a pat on the butt for good behavior in a government study on Wednesday, while Sheila Bair’s Federal Deposit Insurance Corp. is reportedly questioning the review, the Wall Street Journal reports.

The Fed released news of the seventh-straight monthly decline in consumer credit, the deepest ever measured, without comment.

I feel caught in one of the great good-news-bad-news deals of all time. The longer the authorities wait to take effective action on housing and credit, the better the chance of an economic breach big enough to get them off the dime.

The incremental alternative is to stumble along, pecked at by hawks. Renewing the first-time homebuyer credit and fiddling with mortgage modification won’t do it.

In this astonishingly passive and leaderless economic administration, one voice stood out. Elizabeth Warren, congressional overseer for the Troubled Asset Relief Program overseer and blunt Harvard University professor, spoke the unspeakable yesterday: Foreclosures are completely out of control and threaten the whole economy.

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

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