Thugonomics 102: 'Significant Volatility' Budgets Have Busted, and Bubbles Have Burst

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If
I, or anyone else, for that matter, had written a piece last year
saying without reservation that the American housing market would
be in serious jeopardy by now, it would amount to a forfeiture of
journalistic credibility until such time as I was proven right.
That time would be henceforth coming, if you're the type who reads
such fringe fantasia as the Wall Street Journal, which takes
the most “conservative” of stances among the daily press. It is,
by way of both strategic position and popular conception, the voice
of perhaps this country's most notoriously maligned minority group,
the administrators of financial power. If the Florida Times-Union
represents the top stratum of Jacksonville's power base, the Journal
represents those to whom our local and regional elite must pay fealty
with every eighth breath, to say nothing of interest. So if WSJ
sez it, then is must be somewhere close enough to true, especially
if it's bad news, eh?

“Bargain
Hunters Hesitate With Freddie Mac” was written by Ken Brown for
the July 2 WSJ. The lead “If Freddie Mac's stock were a house,
it would be the ultimate u2018fixer-upper': On the surface it's a bargain,
but unseen problems could make it a money pit.” Ironically, Freddie
Mac's business is house-buying. It's one of two huge corporations
formed during the New Deal to underwrite the cost of new home ownership;
the other is Fannie Mae, which is a little bigger. They are the
second- and fourth-largest financial institutions in America, but
they function almost like the same company. Now, both are under
suspicion of shady accounting tactics of the sort that should be
overly familiar by now.

The
story's focus was on the 21% drop in Freddie Mac stock that had
occurred since “the departure of three top executives” on June 6.
Brown used the most diplomatic language available to downplay what
others have characterized as “resignation” or “firing.” Or maybe
they just got better jobs at Fannie Mae. The three graphs that accompanies
the story makes the point in clearer terms: Freddie Mac stock has
been unstable all year, despite earnings having increased steadily
in the last three quarters of 2002. The stock's gone as low as $47.35
on June 12, from a high of $65 in late January; had it not climbed
to $52 by July 2, the drop would have been 27% instead of 21%.

Those
graphs are something to behold. They show that, after over five
years of calm, steady growth, earnings patterns fluctuated wildly
in 2002. 9/11 doesn't explain it, and the budget crisis has only
recently become a public problem. During the same three fiscal quarters
in which Freddie Mac's earnings rose by about half a billion dollars
per quarter, Fannie Mae tumbled by about the same amount, resulting
in the first two quarters since at least 1996 that Freddie out-earned
Fannie. A setback for feminism, perhaps, but it's cool because Fannie
Mae came roaring back in its first statements for 2003, almost doubling
its earnings. Meanwhile, Freddie Mac's performance in that period
is not yet a matter of record, except that “three top executives”
are no longer.

Brown
further adds that “Wall Street analysts expect the company to boost
earnings 13% a year over the next three to five years, but the concern
is that earnings could soar one quarter and fluctuate wildly quarter
to quarter, with one period's growth being 10%, the next 20%, or
even extremes where there are declines of 10% or more offset by
50% growth in other quarters.” These analysts should see the graphs,
too.

Of
course, earnings statements are a different matter than the stock
price. But there is really no excuse for touting a 60 year-old company
that holds $572 billion in other people's debt as “a Bargain,” especially
if their earnings have increased by an average of 33% in each of
the last five years. It is for very specific reasons not a company
to be trifled with for short-term profits, so why is the discovery
of “errors . . . [that] involved garden-variety transactions – well
over 100,000 of them” cause for salivation in circles that seem
to have ignored six straight months of obvious trouble?

Freddie
and Fannie are both built on the incursion of debt, and so their
earnings can be construed in part as an expression of the public's
willingness to take on such large-scale debt as is needed for the
average person to buy a home. Over the course of a mortgage, interest
will account for about half of the total paid out over the life
of that mortgage. Thus, the average person will need all of 854
weekly paychecks (or, 427 biweekly paychecks) to pay for an average
existing home. God help you if you're uppity. That means a minimum
of 16.4 years spent paying off the mortgage if the mortgage payment
is your only expense; but for whom is that the case?

This
is all somewhat personal for me, because I have loved ones who are
looking to buy a home. Home ownership has always been a very good
idea, among the soundest investments one can undertake. It is troubling
to know that I cannot in good conscience advise them to pursue the
venture right now, though people really should be thinking about
permanence. But the biggest and most profound threat to permanence
right now is the household debt-load, which has been built up by
the interest on credit cards and home mortgages.

The
average debt of American households has increased by 56% from 1995-2002,
from $49,639-$77,466, according to statistics from the Federal Reserve
and the US Dept. of Commerce. That figure was $10,406 in 1975, and
that is what happened to this country. There has been an explosion
of debt in America during the past quarter-century. Household debt
alone is now $8.4 trillion, $6 trillion of which is the principal
on mortgages; “disposable personal income” only totals $7.8 trillion.
And of the areas in which household debt grew in 2002, home mortgage
debt led the way at 12.7%, the highest growth rate in any area of
the US economy since 1999. (By contrast, consumer credit grew by
only 3.3% – they got their pound of flesh in the mid-u201890s.)

The
debt-spiral has had a catastrophic effect on neighborhood unity
and municipal
sovereignty in the post-Bretton-Woods era, a process that has accelerated
during the so-called “boom” economy of the 1990s. More families
have been broken by money than by alcohol, drugs and maybe even
domestic violence, and surely much of that self-destructiveness
was spurned by the emasculating effect of debt on mankind.

What
do we say to the families that picked up another $668 billion in
mortgages last year? What happens when they start to act like CEOs
and skip out on their debts en masse? Is there any way of actually
enforcing all the debt currently outstanding without basically shutting
down the economy? If not, then how is that debt managed without
undermining the delicate moral and legal framework upon which the
concept of debt is based? These are questions that citizens and
our government need to be asking now, while there's time.

July
5, 2003

Shelton
Hull [send him mail] is
a columnist and writer based in Jacksonville, Florida. His work
has appeared in FolioWeekly, Counterpunch, Ink19 and Section
8 Magazine.


     

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