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One of the biggest disappointments of the recovery

Daily Ticker

Americans are swimming in debt and that's holding back the economy, says Cardiff Garcia, U.S. editor of FT Alphaville. By the end of the first quarter U.S. households were $11.65 trillion in debt, according to the New York Fed. That's bigger than the GDP of any country or region in the world except the U.S. and the European Union.

The fastest growing debt category: student loans, which top $1 trillion. Pew Research reported this week that four in ten U.S. households (37%) headed by an adult younger than 40 have student debt. Households with student loan debt have a median net worth of $8,700 compared to $64,700 for households without student debt, Pew reports.

Related: Exploding student loan debt threatens the housing recovery

These high levels of debt are restraining household formations, which is "hugely important," Garcia explains in the video above. Slower household formation means less demand for buying homes or apartments, which, in turn, translates into less construction and construction jobs. And even young households looking to buy residential real estate have a harder time getting a mortgage.

Perhaps that's one reason Melvin Watt, the new head of the Federal Housing Finance Agency, announced this week that the agency would not reduce the size of the mortgages Fannie Mae (FNMA) and Freddie Mac (FMCC) guarantee.

Related: Here's what's stopping the economy from fully recovering: Neil Irwin

“I don’t think it’s the FHFA’s role to contract the footprint of Fannie and Freddie,” Watt said during an appearance in Washington where he outlined his plans for the two mortgage giants. Fannie and Freddie guarantee about 60% of all new mortgages. The FHFA is their overseer.

"The GSEs are back in business," says Garcia. "In the short term that will provide some kind of economic benefit...the question is what happens over the long term and part of it depends on what role you think the GSEs should play."

Members of Congress -- and Watt's predecessor, Ed DeMarco -- have wanted to scale back the role of the Fannie and Freddie and allow more private capital into the mortgage market. Garcia says such a move "will certainly be better" but not if it's done quickly.

"It’s not something that can be done overnight...it will take decades," says Garcia. Fannie and Freddie are "so intertwined with the housing market...that you will essentially shut down the housing market."

Related: Why the housing market is suddenly struggling

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