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Economists incorrectly believe consumption powers economic growth. Actually, consumption is a consequence of economic growth. To believe consumption powers growth is the equivalent of believing that wet sidewalks cause rain.

Keep this in mind as Freddie Mac quietly seeks approval from the Federal Housing Finance Agency (FHFA) to back second mortgages. If approval is granted, the U.S. economy will suffer.

But wait, many economists will do doubt say: if Freddie Mac can expand into second mortgages, those who avail themselves of Freddie’s new product will collectively have $2 trillion in extra funds that they can use to go shopping with. Think of the growth from all that consumption!

Except that even if you naively believe – as economists do – that consumption powers economic growth, there quite simply would be no new consumption. The latter is always and everywhere a consequence of production, and Freddie Mac isn’t producing anything. Instead, it’s just extracting already-produced wealth from the private sector that it will finance the mortgages with. Meaning, Freddie would just shift consumptive ability from one set of hands to another.

Which means once again that even if you believe that suntans cause sun, and that by extension consumption powers economic growth, you can’t get around the fact that Freddie Mac will not be introducing any new consumption. Production itself is the only source of new demand, which means the $2 trillion in consumption would take place with or without Freddie Mac arrogating to itself a new role in the mortgage finance market. In other words, if Freddie Mac is wisely restrained from creating a new business line, the $2 trillion in consumption will happen; the only difference being that an entity with implied taxpayer backing (and after 2008, explicit taxpayer backing) won’t be taking on more debt on the backs of taxpayers.

Seemingly lost on those cheerleading this faux “stimulus” is that the last thing governments would ever need to do is encourage consumption. The desire to consume instigates all production. Put another way, we get up and go to work each day with an eye on producing a little or a lot in order to get a little or a lot. Consumption is the easy part. It’s what we all want to do, and our production enables it. No government prodding needed.

Just the same, it’s useful to point out that there are no entrepreneurs and there’s no business expansion without capital. Keep the latter in mind when governments extract the money of others in order to encourage consumption. These actions don’t stimulate economic growth simply because the taxation required to fund wealth redistribution by definition shrinks unspent wealth, or the very savings that entrepreneurs and businesses vie to attain with innovation or expansion in mind.

Please think about all this given Freddie Mac’s desire to enter the 2nd mortgage space. Freddie Mac, like the government that backs it, has no resources. Its swagger is not its own. Its resource is the taxable access to private wealth of the government it serves.

Which means that in expanding its remit to 2nd mortgages, Freddie Mac would be extracting $2 trillion worth of wealth, some of which would otherwise exist as part of the capital base for entrepreneurs and businesses to access. But instead of some of the $2 trillion morphing into growth-enhancing investment, the money would instead just be redistributed from the capital base to direct consumption. Again, there’s nothing growth-oriented about Freddie’s plan. Quite the opposite.

Since Freddie Mac’s search for an expanded purpose with the money of others would logically sap economic growth now and in the future, we can only hope that instead of allowing Freddie to put taxpayers on the hook while laying a $2 trillion weight on the economy, FHFA steps in to veto that which would be good for Freddie Mac, and by extension bad for the rest of us.

John Tamny is editor of RealClearMarkets, President of the Parkview Institute, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book, released on April 16, 2024 and co-authored with Jack Ryan, is Bringing Adam Smith Into the American Home: A Case Against Homeownership


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