In the last 10 days, stocks had improved and interest rates risen during a general relaxation of panic.

Even so, unmistakable evidence of faltering recovery has pushed a lot of money back to the safety of bonds, and rates are again near all-time lows. Thus panic is morphing quietly to resignation.

Something odd happened to the economy in May, but it is not clear what. All of the data arriving for several weeks has had the same pattern: weaker than prior report, and below the reduced forecast.

In the last 10 days, stocks had improved and interest rates risen during a general relaxation of panic.

Even so, unmistakable evidence of faltering recovery has pushed a lot of money back to the safety of bonds, and rates are again near all-time lows. Thus panic is morphing quietly to resignation.

Something odd happened to the economy in May, but it is not clear what. All of the data arriving for several weeks has had the same pattern: weaker than prior report, and below the reduced forecast.

June retail sales were supposed to slide 0.2 percent, but arrived at -0.5 percent; The New York Federal Reserve’s July index was expected at 18, down from June’s 19.57, and came in at 5.08; the Philadelphia Fed’s index forecast was 8, down from 10, and landed at 5.

The National Federation of Independent Business’ confidence index (www.nfib.com) coughed up three months of gains, back into deep recession. Purchase-mortgage applications fell again, down 3.1 percent — 44 percent below April levels despite mortgage rates near 4.5 percent.

The Fed released the minutes of its June 22-23 meeting, which cut its forecast for gross domestic product growth by 0.2 percent to a 3 percent to 3.5 percent range for the whole year. Ain’t going to happen.

The new-data string above has already fallen out from under the Fed’s June thinking. First-quarter GDP grew 2.7 percent annualized, and may turn out to be the best quarter of 2010.

Some thought the British Petroleum well cap might bring some joy to markets. It did not, and should not. The total spill, 86 days at maybe 50,000 barrels per day, is equal to the oil product burned in American cars and trucks … in half of one average day.

In bizarre, uniquely American good news, the financial regulatory reform bill is a fine legislative accomplishment. Oh, it’s 2,300 pages of sand in the gears and bureaucratic bloat, but when you consider the damage it could have inflicted … well done, Congress.

Months of haggling defused dozens of energetic and dangerous proposals from left and right. In a triumph of democracy, the bill reflects the state of mind of the people: collectively, civilians still have no idea what happened to cause the Great Predicament, and so Congress felt little pressure to do much of anything in particular, and didn’t.

Instead, it did one thing very well: It has ratified the emergency actions of the Fed and Treasury from 2007-09 by granting general powers to intervene as they did, adding explicit clout to fold up failing giants, and established a systemic watchdog.

However, Congress avoided "thou-shalt" specifics (such-and-such ratio, or bust up so-and-so) in favor of a flexible command authority: "Thou shalt use thy head."

Have no doubt that this generation of regulators will use the powers granted, just as their granddaddies did from the 1930s until their kids gradually forgot in the 1980s. Good thing, too.

Despite renewed vigilance, it won’t be long before the next financial predicament. In all the recent praise for the genuinely fine public servant, Paul Volcker (an economist and former Fed chairman), do not forget that his watch included the savings and loan catastrophe and the first pack of imperial bankers making immensely stupid loans with petrodollars.

By now, no one should have faith in capital, moral hazard, Mr. Market, skin-in-the-game, the Volcker Rule, or size reduction to prevent future episodes. Credit is too slippery.

In good times, even cautious lenders cannot fully know the asset-market impact of their own and their competitors’ prudent loans. Asset markets tend to continue to rise after they’ve risen because they look safer to lenders and draw more credit.

In that upward-spiraling, imprudent lenders always enter, but prudent lenders can rightly say (as I did 2003-2004, to my eternal regret), "I’m not making risky loans, they are." Levered assets have no inherent value beyond the prices buyers will pay, and will continue to inflate, indifferent to prudence and folly until all are fools.

We can aspire to vigilant regulators with itchy trigger fingers, to whom this financial reform legislation has given authority to match responsibility. We can expect them to moderate the pace of innovation, not prevent it.

And we can hope that they will occasionally find a deserving miscreant, and shoot him as an example to the others.

But we should never, ever expect to suspend the credit cycle.

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