Dan Spillane: The McMansions Which Ate Your Job

(SEATTLE) 03/05/04 - Once again, net job growth in the US economy is negative, even while a record number of workers are already unemployed (1). Once again, the administration quotes record GDP growth -- which occurred without job growth. All this confusion leads to a number of economists scratching their heads, some stating the economy is in "uncharted territory."

Indeed.

But there is absolutely no mystery as to what is going on, if economists would simply study economic statistics, and the micro-economies which led to recent jobless GDP growth. Namely, aside from a short-term boost in high tech purchases, most of the cited GDP growth is tied directly or indirectly to a cycle related to home prices, and an unprecedented, quick and easy credit supply related to homes.

Let's not forget, that the current ultra-low interest environment is more or less an "experiment"--which in practice, is leading to a bizarre cornucopia of credit.

Such an endless credit cycle would seem impossible--after all, who would underwrite a bottomless pit of credit, where houses go up nearly 20 percent annualized, and people borrow against them, even while jobs to pay for the same don' t develop?

The answer is, for all "sound" intents and purposes, that "no one" would do this. No one, that is, who is actually running a sound balance sheet with adequate and diverse reserves. However, in this particular case, the "no one" goes by the name of mortgage giants Fannie Mae and Freddie Mac, who are systematically picking up and packaging mortgages, and increasingly, holding onto them, regardless of home price or risk. (2) (3)

Maybe economists are politically oblivious. But they certainly must have noticed a succession of scandals and departures surrounding Fannie and Freddie--the departure of a Bush cabinet member who had oversight, and now a major lobbyist? And what of the number of fines recently related to improper GOP donations?

In this "new, new" economy, it's much quicker, and more "productive" to borrow against ever-larger homes, than to support an economy which requires actual workers and wages. Fannie Mae, the homebuilders, and GOP supporters make sure 25K chunks are available with a few points and clicks--or at least, the ones who haven't departed, and are still cashing in.

You see, it was not without reason that a normally upbeat and very Republican Greenspan warned recently about debt growth at Fannie Mae and Freddie Mac. There is no mystery at hand. Next time you hear the GOP touting GDP growth without jobs, remember that such is a symptom of something gone horribly awry--a mortgage system turned into a dark beast, which serves as a quick surrogate for jobs, and according to Greenspan, is surely headed for trouble.

(1) Job growth of 140-150K is needed just to cover new workers, hence, any number below that level adds new unemployed to the already record base.

(2) This arrangement benefits Fannie and Freddie shareholders, and even more so, various homebuilders, who find they can raise prices eternally, with no risk to them.

(3) According to a March 2004 report, a number of FDIC banks have been accumulating Fannie/Freddie mortgage securities as "first tier" holdings--even though there is no real backing.

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