Today's employment report reinforces two major themes: the economy is contracting, but the depth of contraction is not yet deep. The data are better than feared, as yesterday's jobless claims figure caused many to downgrade their assessment of the labor market. There continue to be problems with adjusting for the amount of net business formation, but even with an adjustment for this glaring fact the figures are not yet as weak as in past recessions. It's more a slow bleed.

The economy lost jobs for a seventh straight month, shedding 51k jobs for a second month and bringing the average size of job losses for the seven months to 66k. These losses are consistent with economic recession but better than past recessions. For example, in the first seven months of the 2001 recession, job losses averaged 145k. In the first seven months of the 1990-1991 recession, job losses averaged 117k (keep in mind the fact that the workforce constantly increases, which should result in larger job losses as time goes on).

The increase in the jobless rate, to 5.7% from 5.6%, will not play well on Main Street and will impact consumer confidence as well as business confidence, as many will fixate on this most-understandable economic statistic. The increase follows a large half-point leap in May, which was the largest monthly increase since February 1986.

Minor solace will be had by observations about the wage figure, which increased an as-expected 0.3%. The gain is not large enough to illicit thoughts that wage demands are increasing much as a result of the recent acceleration of inflation.

Continuing to be odd is the government's assumption about the amount of net business formation occurring in the economy, which is represented by the statistics computed using the so-called birth/death model. In July, the Bureau of Labor Statistics added 4k jobs to the tally, 1k more than last July and 46k more than the 5-year average for the July data (January and July historically are two months when the amount of net business formation is negative). The fact that the government is adding in more jobs than in recent years seems odd given the downshifting in growth and in overall job creation. Most absurd is the assumption for net business formation in the construction sector, which resulted in a 1k boost in jobs to the sector compared to assumptions for slight losses on average over the past three years. It is obvious that the construction sector is contracting, yet the government has not yet made this assumption in its estimation of net business formation for the sector.

It wasn’t speculators; it wasn’t corporate greed; it wasn’t deregulation, nor Reaganomics. Fannie’s near-death experience came directly from her sponsor, the Federal government, which treated Fannie Mae like its own personal honey jar, to be raided at will.

Loading up the GSE (government-sponsored enterprise) with "pinstripe patronage" hires, dumping political loyalists and failed bureaucrats (like the former FBI chief whose tenure ended with the catastrophic intelligence failure known as 9/11), and practicing identity politics vote-buying using the GSE’s balance sheets, our representatives insured the bank’s eventual collapse.

Not surprisingly, those representatives are going to use our money to resuscitate their monster.

FNMA emerged out of the alphabet soup of New Deal regulatory agencies created during the 1930s under FDR. Desperate for cash, LBJ sold it to the public in 1968, creating what we now call Fannie Mae.

The Feds sold it but never really relinquished complete control of, or liabilities from, the entity. Fannie became a genetic splice of public and private -- merging the transparency of high finance with the efficiency of government -- a place to park political friends looking for work, and an instrument with which to engage in vote buying and social engineering.

Fannie, despite not being a direct mortgage lender, played her role well as midwife to the subprime mortgage bubble and the crisis that came from it. Regulators encouraged banks to discard traditional lending standards, which require a thorough credit history or a steady paycheck, and opt for standards which are not "discriminatory" or culturally biased. Don’t worry, they advised, Fannie and Freddie Mac will buy the paper.

Fannie did her part.

The internal investigation of allegations of accounting fraud -- which led to the departure of previous FNM CEO, Franklin Delano Raines, a former Clinton Administration official -- included a critique of the bank's "minority lending initiative," or MLI.

(See the full report here. )

Awhistle-blower in the company circulated an e-mail claiming that Fannie bought mortgages which were not financially sound, in order to bolster its minority-lending portfolio and resultantly, its political capital.

The report concluded that, indeed, Fannie had paid prices more consistent with prime mortgage values for loans that were closer to subprime in their credit characteristics. To add insult to injury, Fannie "capitalized" rather than expensed these premiums, and so doing exaggerated its earnings and the salaries of managers who received performance bonuses.

Nothing is more frustrating to me than to see this crisis laid at the door of "market failure" and thrown into the face of supply-siders like me. Fannie's not ours and she never was. From government she came; and whenever her plans fail, to government she returns.

What are other CNBC.com guest commentators saying?

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Many might be wondering why it is that Treasuries are trading well today. The answer really should be: why are equities trading so poorly. I do not see anything unusual in the way Treasuries are acting, but here goes.

Here are a few reasons for the Treasury market's strength:

1) The equity market has retraced over 50% of its recent gains from the low of 10,828 on July 15th to the high of 11,698 on July 23rd. Weakness in financial shares highlight today's setback.

2) Economic data in Europe was again weak, with Germany's GfK AG's consumer confidence index slipping to a 5-year low (based on 2,000 responses). This helped rally European government bonds, boosting Treasuries.

3) Certain mortgage-backed securities saw buying earlier in the session, perhaps because a swath of portfolio managers including Bill Gross at Pimco have recently said the securities hold value. The buying lends a bid to Treasuries in a number of ways including the reduction of dealer inventories and by improving the relative value of Treasuries (miniscule so far given the arguably overvalued level of Treasuries).

4) The Federal Reserve Bank of Dallas reported today that its manufacturing index for the month of July fell to -27.4 from -24.1.

5) There is a story on ABCNews.com that stirred a bit of chatter regarding the Department of Homeland Security. Read it and draw your own conclusions.

6) The International Monetary Fund delivered its Financial Stability Report today, saying the following: "Global financial markets continue to be fragile and indicators of systemic risk remain elevated. Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply. This has made raising additional capital more difficult and increased the likelihood of a negative interaction between banking system adjustment and the real economy. At the same time, policy trade-offs between inflation, growth, and financial stability are becoming increasingly difficult. The resilience of emerging markets to the global turmoil is being tested as external financing conditions tighten and policymakers face rising inflation."

7) There had been concern recently that the Treasury Department might introduce in its Wednesday quarterly refunding announcement new securities into its current mix of offerings in order to fund the growing budget deficit. Unfounded chatter over the possibility of either a 7-year or a 15-year maturity weighed upon Treasuries. The 7-year note is one that in past years was loathed. Market concerns regarding these possibilities have subsided, in part because many analysts have been dismissing the idea.

8) Inflation expectations and expectations over the odds of near-term Fed rate hikes have subsided. For example, 10-year inflation-indexed Treasuries are priced for a 2.34% consumer price index, down from a peak of 2.60% on July 4th. As for the Fed, the market is priced for the funds rate to end 2008 at 2.255%, down 5 basis points on the day and well below the peak of 2.86% set on June 12th.

More: Click for Latest Economic coverage ...

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Much attention has been paid recently on the impact that the credit crisis might have on businesses, with most concluding that

business loans will more difficult to obtain

. There is already plenty of evidence in this regard. Recent data indicate that business lending has in fact slowed, although probably not as much as feared and certainly not nearly as much as in the credit crunch of the early 1990s.

New data released late Friday by the Federal Reserve indicate that commercial & industrial loans increased $4.4 billion to $1.512, the fifth gain in six weeks and only fractionally away from the record high set four weeks ago.

The growth rate for the past three months was 6.2%, which compares favorably with the past two recessions. For example, from March 2001 (the start date of the last recession) until April 2004, commercial & industrial loans fell at a 6.5% annual rate. From July 1990 (the start date of the recession of 1990-1991) until December 1993, commercial & industrial loans fell at a 2.7% annual rate.

More: Click for Latest Economic coverage ...

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Randy Pausch, deliverer of what has come to be known as The Last Lecture, passed last night.

Millions of people saw it: Dr. Pausch’s Carnegie Mellon University address, in which he announced his terminal pancreatic cancer. Instead of wallowing in self-pity, he used his affliction as a take-off point for transmitting his life lessons.

It was pure CMU stuff; a youngish, athletic professor, technological and pragmatic. CMU features an emphasis on problem solving, and used to -- perhaps still does -- require that as part of their freshman core curriculum. I have a few friends who teach economics there, but they call it ‘decision sciences’. These are the best and brightest, and the Last Lecture showed that.

The problem is that even the best and brightest are not good or smart enough. There are some problems which even they can’t solve. That was the subject of the Real Last Lecture. Not the one which circulated on the internet, then turned into a book and a virtual cottage industry of commentators and bloggers.

The real last lecture was given when that second to the last lecture ended; when he made the decision to enter into palliative care.

There are limits. CMU is slow to admit this. Randy Pausch is slow to admit this. Jerry Bowyer is slow to admit this, and so are you. Some problems appear far above our pay grade. If you read CNBC.com, like I do, you are probably slower to admit this than others.

Randy spoke about some powerful life lessons: “Experience is what we get when we don’t get what we want.” “Walls aren’t there to stop us; they are there to see how badly we want something.” That’s all good stuff. It’s the kind of stuff good men tell their kids.

But some walls do stop us. No amount of positive thinking, or chemo, or stem cells, or push-ups or lectures or ‘decision sciences’ get through. No tree of life, whose fruit we are permitted to grab. No alchemist’s philosopher’s stone from which we can wring the elixir of life.

Randy Pausch’s last lecture was mortality. He didn’t speak it, he lived it. By entering hospice, he implicitly said “no more needles, no more pills, no more chemo, vomiting and pain, which my wife experiences right along with me. Let me leave in peace. Let me be with them completely for this last bit. I can’t live forever, and I know this.”

A good friend of mine was at a conference a few years ago, one filled with very influential business executives. The lecture was about science and longevity. The speaker asked the audience how many of them would like to live for 100 years. Almost every hand went up. Then he asked them if they would like to live for 250 years, almost as many hands. Finally, he asked if they would like to live for more than 250 years, still a majority -- not including my friend.

This week Randy answered that question for himself. Better to have better days than more days. Better to end well, then to try not to end. That was, in my opinion, his last and best lecture.

What are other CNBC.com guest commentators saying?

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It's gorgeous in NY today. I got CNBC's Dylan Ratigan properly irate, him being in a suit and all, and we have had a run of surprisingly good numbers reported today. Durable goods advanced .8% when expectations were for much less. Without the highly volatile transportation figures, the number was even better at a +2% reading. New home sales were better than hoped for at a 530,000 rate and the prior month was revised upwards. The supply of new homes being offered for sale is still historically high at 10 months, but that is down from last months 10.4 months.

John Ryding, formerly of Bear Stearns and now in his own shop, RDQ Economics, mentioned in a note that new home sales have risen at a 13.9% annual rate the last three months (although still down a good bit against the prior quarter), and existing home sales were reported "down only 6.3% at an annual rate over the same three month period." All these numbers are subject to revision, but they read good today.

I don't pay much attention to consumer confidence surveys unless they serve my point, so I'll mention the Univ. of Michigan's consumer confidence survey came in much better at 61.2 from an originally reported 56.6 and well above expectations. I'll guess the softening in the headline price of crude oil helped this number. It is a bit sobering though to reflect that this survey was 88 in the last recession.

Credit markets are calming down after the FNM /FRE crisis. The TED spread - the difference between the 3 month US Treasury bill and the three month London interbank offer rate- is back to 116 from a recent peak of 146 on July 15. The bigger the number the more fear there is in the system. The 10 year average is around 48 basis points so there is a long way to go, but we are off the peak fear levels of just a few weeks ago. Also, the difference between the 10 year Treasury Inflation Protected Security (TIPS) and the conventional 10 year note is 2.32%. That is down 10 basis points since I wrote about it a week ago. It represents the expected rate of inflation for the next 10 years.

Foreclosures of homes spiked 14% in the second quarter and made for a big splashy headline. I'm not indifferent to the pain such a number represents, but for our purposes this is old, old news. A home takes almost 180 days to finally get into foreclosure after being late on payments, so the number that is more relevant is the current rate of new mortgage delinquencies- which will be tomorrows foreclosures. I mentioned Tom Brown of Bankstocks.com a few weeks ago and his work analyzing the pace of delinquencies shows they have been increasing, but at a declining rate. The so called second derivative has turned.

As I write this just before lunch on Friday, oil is down again and the dollar is trading flat to slightly positive. We are in a bear market but not all is doom and gloom. There are a number of lights at the end of the bear tunnel.

I should have shut my mouth. I will be putting on a suit today and doing Larry Kudlow's show at 7 PM NY time tonight. It's always a pleasure but we have some good stuff to talk about tonight.

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Just to annoy Dylan Ratigan I want to make sure everyone knows I'm working from home today. I have sandals and a tee shirt on. No suit, no tie. And Dylan does. I also wouldn't be able to get within a mile of my office at Rockefeller Center. Mylie Cyrus (did I spell that right?) is performing in the Plaza and a notice went out not to even try doing anything but going the long way around and through the 6th Ave. subway entrance. When I left Thursday night there were several hundred young girls and Mom's settled in to camp out for the night. Remarkable!

As we all know the market got crushed Thursday. The report that existing home sales fell more than expected seemed more than the market could bear. The report was no where near as bad as interpreted with the price decline on an annual rate much less than recent reports. A short while ago home prices were falling at an annual rate of -30% and this report shows them falling at a -3% annual rate and the median price of a home at $215,000 is well ahead of February's hysterical low $196,000.

The Fed's beige book (so called for the color of its cover) reported that economic activity slowed in June and July and that all 12 districts showed increasing price pressures. No new news but Fed Governors like Charles Plosser will probably renew the call for an increase in rates to cut inflation off at the pass.

Oil finished the open out-cry session at 2:30 pm NY time down almost $4 to $124.50. An article in the paper the other day said that at $135 a barrel the known reserves of the oil exporting countries would be worth $140 trillion (TRILLION!) That would be over the life of the reserves and not present value, but the point is staggering. The market capitalization of all the stock exchanges is about one-third of that and total global GDP is around $60 trillion a year.

It makes Boone Picken's pointto Melissa Francis on CNBC the other day ever more valid. Mr. Pickens--my candidate for Energy Czar--says we send $700 billion a year overseas to pay for the 70% of our oil we need to import. He favors mandating that vehicles that deliver goods, e.g. trucks, be mandated to use Compressed Natural Gas, CNG, and we would keep $300 billion of the $700 in this country as natural gas is essentially a domestic market.

Another thing that caught my eye was an article in the paper that said the wealthiest 1% of Americans- those earning more than $388,806- reported 22% of the nations adjusted gross income in 2006. Wow ! But that 1% paid 39.9% of all income taxes. I dug out an editorial from the WSJ that appeared recently to add some additional flavor. The top 10% of incomes-those earning more than $108,904- paid 71% of all taxes. Sounds like a progressive tax structure to me.

I will be on the "Closing Bell" at about 3:30 today. Gotta run.

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As T. Boone Pickens in the Wall Street Journal described hismaster plan for solving an aspect of the US energy crisis:dependence on foreign oil. At its core, this solution wasreally only a swap of foreign energy sources from oil tonatural gas.

In his article , Boone has this to say about the plan: "Myplan calls for taking the energy generated by wind and using itto replace a significant percentage of the natural gas that isnow being used to fuel our power plants. Today, natural gasaccounts for about 22% of our electricity generation in theU.S. We can use new wind capacity to free up the natural gasfor use as a transportation fuel."

"That would displace more than one-third of our foreign oilimports. Natural gas is the only domestic energy of size thatcan be used to replace oil used for transportation, and it isabundant in the U.S. It is cheap and it is clean. With eightmillion natural-gas-powered vehicles on the road world-wide,the technology already exists to rapidly build out fleets oftrucks, buses and even cars using natural gas as a fuel. Ofthese eight million vehicles, the U.S. has a paltry 150,000right now. We can and should do so much more to build our fleetof natural-gas-powered vehicles."

At the time, CNBC's Phil LeBeau aptly pointed out that thereare only 1,000 cars on the road (mainly in CA) that use naturalgas and it's unlikely the auto industry would commit tobuilding more. There just isn't the infrastructure to servicethe cars nor to fuel them on the road nor do they have range ofcurrent cars. Three strikes you're out.

More importantly, there is the law of unintendedconsequences for natural gas. With a shift in demand to naturalgas away from oil, the price of natural gas isn't going to sitstill. It's currently $12.30 and it's going to move up. Howhigh, I'm not sure but it would certainly increase the cost ofsuch a plan. Most importantly, it could significantly increasethe cost of something else: food. Natural gas is a majorcomponent of making fertilizer. Even in the short run,potential higher food costs alone would derail such a plan.

However, Boone's plan is a major positive step forward inthe discussion about energy in the US. His ideas about winddeserve serious consideration albeit with a subsidy. As amatter of fact,the windindustry is currently asking for a renewal of the tax subsidynow. (Was this Boone's way of pushing theprocess?) Also, Texas just embarked upon a multi-billion dollarprogram for new wind capacity to generate electricity for 3.7million homes. The state is now known as a "wind-rich" statewhich refers to energy not politicians.

The more intriguing question is when will Congress/Presidentcreate a unified energy policy? This is why people with visionare so critical for the country: they recognize a major problemand they offer a SOLUTION! Boone's plan is an intriguing pieceof the energy puzzle.

Remember, this isn't just about what we can do now for theprice of gasoline or energy. If this was the only criteria, wewould only engage in short term policy changes that have shortterm impacts like opening up the strategic petroleumreserve.

We need longer term plans to solve the longer term energyproblems of United States. In case you aren't familiar with howmarkets react, a coherent, logical plan of action towardsproviding long term solutions will have a positive impact nowon the price of energy. Why? Because it will shift the shortterm psychology of the market away from doom and gloom towardsa light at the end of the tunnel scenario.

We only need to look at President Bush's lifting of themoratorium on off-shore drilling to see an example of this inthe markets. Did this act significantly change the short termoutlook for oil? No, but it changed the discussion on thesubject at a time when it was needed. In turn, this aided theshift in market psychology back to some fundamentals likedemand.....which is dropping.

This is why it is critical that no long term idea getdiscouraged or disparaged by anyone (Congress, Presidentialhopefuls, or press) when it comes to solving the nations energyproblems. A long term idea can be the short term solution.

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Four out of five major banks have reported better than expected earnings. Wells Fargo even went so far as to raise the dividend. Bank of America started Monday off with a solid beat and a prediction that the recently closed Countrywide acquisition will add to earnings this year.

That's quite a statement when you figure the mess the mortgage market is in. But at a purchase price of $3 billion BAC must figure they have room enough between that price and the stated book value to eat a lot of bad loans. Oil, although up a couple of dollars on Monday, acted well when you take into account that the Iranian talks over the weekend went nowhere and there are a couple of storms that could grow into hurricanes.

So just as it looked the bear market rally could continue, the floor fell out. American Express reported a significant earnings miss after the close and noted consumer spending slowed even among the companies "established members with excellent credit." Texas Instruments earnings were only a tad light but they said chip weakness was spreading to analog chips (not just wireless chips) and analog chips are used in everything from consumer electronics to industrial applications. Apple also issued a weak outlook. All these stocks, along with Merck and Schering-Plough, which shared a failed drug test, were down sharply in after hours trading. Look for a continuation of the bear market as economic weakness appears to have caught up with what had been strong non-financial earnings.

But all is not lost. The average bear market shows a decline of 30%, but then has an average 30% plus bounce when the bottom is reached. We are off more than 20% so it's possible the end is in sight. While it may take more time for the financials to show earnings growth, the stocks will turn long before the earnings bottom is reached. In the S&L crisis in the early 1980's 1,400 banks failed. But, says J.P.Morgan's most recent letter, the stocks bottomed and turned before half of the failures even happened. The banks are now priced at 1 times tangible book value, the same as in 1990.