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.
