Economists have traditionally believed that consumption drives economic growth, but this belief has been challenged by the idea that consumption is actually a consequence of economic growth. To illustrate this point, it is likened to believing that wet sidewalks cause rain. Despite this perspective, Freddie Mac is seeking approval from the Federal Housing Finance Agency (FHFA) to back second mortgages, a move that could have negative implications for the U.S. economy.
Many economists may argue that allowing Freddie Mac to offer second mortgages would result in $2 trillion in extra funds that could fuel increased consumption and economic growth. However, the reality is that consumption is always a result of production, and Freddie Mac would simply be transferring wealth from one set of hands to another without creating any new consumption. The $2 trillion in consumption would occur regardless of Freddie Mac’s involvement in the mortgage market.
Encouraging consumption is not necessary for economic growth, as production is what drives demand. Governments should be wary of extracting money from taxpayers to stimulate consumption, as this shrinks savings that could be used for investment in innovation and expansion. In the case of Freddie Mac’s attempt to enter the second mortgage market, the $2 trillion of wealth that would be extracted could have been used by entrepreneurs and businesses for growth-enhancing investment instead.
Freddie Mac, like the government that supports it, lacks its own resources and relies on access to private wealth through taxation. By expanding its reach into second mortgages, Freddie Mac would be redirecting wealth from the capital base that could have been used for investment. This would not contribute to economic growth, but instead, hinder it by shifting funds from investment to direct consumption. The move could have long-lasting negative effects on the economy if allowed to proceed.
Considering the potential detrimental impact of Freddie Mac’s expansion into second mortgages, it is crucial that the FHFA intervenes to prevent this move. Allowing Freddie Mac to put taxpayers at risk and diverting $2 trillion from potential investment to consumption would not be in the best interest of economic growth. It is important to recognize that true economic growth is driven by production and investment, not simply by consumption, which should serve as a guiding principle in economic policy decisions.
