The unsettling rise in long-term rates has stopped for the moment, economic optimism colliding today with a simply awful employment report for November.

The 10-year T-note has stalled just short of 3 percent (from 2.5 percent centerline, August to mid-November), and mortgages have risen almost to 4.75 percent.

Some aspects of this rate rise have made sense, one has not, and one is trouble.

The straight-line drop in the T-note from 3.99 percent on April 5 to 2.47 percent on Aug. 31 was overdue for a classic, technical, one-third countermove, and that’s what it’s done. As a matter of economic fundamentals, April-August was a time of double-dip expectation, but GDP has held the 2.5 percent area, and most data (all but housing) have shown some improvement. Third, the Fed’s QE2 caused more dumping of bonds than it is buying.

Making no sense to me: no bond rally in reaction to today’s job report. A piddling 39,000 new jobs versus 200,000-plus in forecasts, unemployment up to 9.8 percent, 9 million people still sentenced to "involuntary" part-time work, two years running.

Trouble: The prospect of sovereign defaults all through Club Med, and euro-reversal to local currencies seems to have infected our bonds as well, calling into question the strength of the sovereign guarantee of the U.S. Treasury. Long-term rates are higher here not merely for reasons of recovering economy and inflation risk, but credit risk.

In normal times, economic tides wash in and out of financial markets, refreshing some waders and drowning others. Well-regulated markets are able to moderate and transmit economic change, and economies rarely need rescue by public policy.

Today, everything depends on public policy. Markets are still far from able to stand alone, and have become poor indicators of actual conditions.

Public policy itself is changing and wobbly. Keynesian stimulus is done. Only government-guaranteed credit is widely available but even that inadequate supply is questioned by new arrivals in Congress. Private credit markets are open only to the largest corporate borrowers, and overall credit continues to shrink.

Soon, two new public-policy decisions will say more about how the economy fares than markets will. One looks good and the other scary, but in both cases I’m in the minority: We may make a realistic run at the structural federal deficit, and we may greatly limit the powers of the Federal Reserve.

Nothing would help the American economy more than a deficit fix. Upward pressure on interest rates would cease; an easy Fed could offset austerity without inflation worry; a sound dollar would reassure the whole world; and perhaps most important, responsible management of our affairs would ease the American mind.

The people are miles ahead of those pretending to lead. Those worthies still show every misbehavior that got us into this hole, quibbling their way to inaction. If the president, or in his absence the Congress, offers a budget fix that is real and makes everyone mad about something, the country is in a "Hell yes!" mood. Just do it.

The Fed faces multipartisan assault, taking new heat this week after revealing the massive extent of its ’08-’09 rescue. Its rescue of us. Lefties say that the Fed should not have saved those bad banks and corporations, in an epic odd-coupling with the know-nothing right-wingers who want nobody saved. An op-ed in today’s Wall Street Journal argues against any Fed at all on grounds that it has usurped the fiscal powers of Congress.

Madness … if your house is on fire, you need a fire brigade in minutes, not months.

Another large group of Fed wing-clippers has its own insane certainty. Since government is Bad, and markets are Good, and the Fed is government, salvation lies in unleashing the power of markets and chaining the Fed to mechanical rules. Those so arguing include many of those saved by Fed intervention, and not one will acknowledge that we are still trying to survive the most extraordinary market failure in human history, one which might only have been prevented by a more active Fed.

I do hate to depend on public policy, but here we are.

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