Last week brought a gale of game-changing news, contradicting recovery — and a whiff of panic. This holiday-short week was news-thin, and mid-July marks the beginning of an often sleepy season for markets and the economy.

Panic is sometimes an excellent investment strategy, but it is a difficult frame of mind to maintain. Thus stocks soared 450 points in three days this week, shorts covering, but bond and mortgage yields held extraordinary lows, underlying worry entrenched.

The 10-year T-note rose to 3.05 percent from 2.95 percent (mostly pricing down in advance of next week’s $69 billion Treasury bond sale), but mortgages stayed put in the mid-4s.

Last week brought a gale of game-changing news, contradicting recovery — and a whiff of panic. This holiday-short week was news-thin, and mid-July marks the beginning of an often sleepy season for markets and the economy.

Panic is sometimes an excellent investment strategy, but it is a difficult frame of mind to maintain. Thus stocks soared 450 points in three days this week, shorts covering, but bond and mortgage yields held extraordinary lows, underlying worry entrenched.

The 10-year T-note rose to 3.05 percent from 2.95 percent (mostly pricing down in advance of next week’s $69 billion Treasury bond sale), but mortgages stayed put in the mid-4s.

The economic data that did arrive confirmed a slipping recovery, but not a double-dip. The Institute for Supply Management service-sector report for June followed last week’s pattern: softer than prior month, and well below forecast (May 55.4, forecast 55, actual 53.8).

New claims for unemployment insurance came down 21,000 last week to 454,000, but have been stuck in that range all year long.

Mortgage refi applications have begun to rise, but purchase ones fell again, by 2 percent last week, now 42 percent below the end of April.

There isn’t any way to know for sure, but that decline seems far greater than could be explained by the end of the tax credits and pull-forward of demand. More likely: The tax credits masked an ongoing housing slide.

The most troublesome report was consumer credit: May outstandings dumped $9.1 billion, and the $1 billion gain initially reported for March-April was revised to a $14.9 billion contraction. A debate of sorts continues: Bankers and you-deserve-it analysts insist that credit is shrinking because few will apply, and those who do are poor risks.

As this episode grinds on, there is no question that many people who would have borrowed two years ago, or last year, to buy something or to invest are now too concerned to do anything.

And there are many others whose creditworthiness has weakened since the show stopped in 2007. However, try to tell anyone out here on a real-world sidewalk that credit is not tighter now (and still tightening) than at any other time in their lives, and they’ll laugh at you.

Consider the newest Fannie-Freddie loan data. These government-sponsored entities and the Federal Housing Administration are under terrible pressure to stop lending, exerted by factions that have forever hated them (see: no-government types, most in the financial markets, all bankers, the this’ll-teach-yas, etc.).

The foolishness of 2002-06 should never be repeated. However, in 2007 some 55 percent of GSE mortgages went to applicants with 720-plus credit scores; in 2009, 85 percent. In 2007, 76 percent of applicants put down 20 percent or more; in 2009, 89 percent.

Those changes are not market movements; those are throughputs of requirements. It is one thing to be cautious. But to recalibrate standards to tighter than ever before (’90s, ’80s, ’70s …), that is credit starvation, and makes housing recovery impossible.

Another issue: We are in the process of reducing the rate of homeownership from roughly 69 percent of households back to something sensible: under 65 percent.

The arithmetic alone demands a new investor-buyer for each home conversion from owner to non-owner (or wait for 15 years’ growth in new households). In 2009, GSE loans to would-be landlords were only 2 percent of total production.

And people wonder why Mr. Market cannot absorb inventory, troubled or not, no matter how far prices fall.

We do not have deflation in general prices, but we are years into asset deflation and its very peculiar effects. Interest rates go to record lows, but purchasing power and theoretical affordability are canceled by lender panic.

Furious attempts to de-lever increase leverage, as assets fall in value faster than borrowers can pay down loans.

It may be good national policy, supported by consensus, to reduce resources allocated to housing. We may also decide to live with less credit than any time since World War II.

However, to attempt such strategic change in the belly of this recession is a failure of observation, public policy, regulation and imagination.

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