The Most Ridiculous Argument for Keeping Fannie and Freddie Yet

There are plenty of plausible reasons why some people favor the government maintaining an influence in the housing market. Some believe a government guarantee is necessary to ensure the availability of 30-year mortgages; others think the government should maintain a presence to provide liquidity to the housing market during a financial crisis. And if the government does keep its hands in the market, then you could also argue that Fannie Mae and Freddie Mac should be the vessel through which it should do so.

But it's also easy to think up rather absurd or silly reasons why Fannie and Freddie should be kept around. Maybe someone out of good ideas could argue that Fannie and Freddie are very catchy nicknames, and it would be a shame to lose them. An idea nearly as ridiculous was suggested over the weekend by Washington Post columnist Steven Pearlstein. He worries that shuttering Fannie and Freddie will hurt the District of Columbia due to the jobs that would be lost.

Here's Pearlstein:

Whatever is decided will have significant impact on the national housing market and the economy. But the much bigger impact could be on the economy of the Washington region. Fan and Fred are among the largest private employers and the pillars of a much larger housing finance cluster that accounts for tens of thousands of high-paying jobs. They have helped to make Washington the capital of the secondary mortgage market and a growing center for banking, finance and asset management. If the conservative ideologues have their way, this engine of the regional economy will be dismantled and shipped north to Wall Street.

This issue belongs at the top of the priority list for the region's business and political leaders. The looming reduction in government spending already casts a menacing cloud over the area's economy, and the dismantling of Fannie and Freddie would be a body blow.

This is easily the most bizarre reason for keeping Fannie and Freddie around that has been suggested yet. So let's see if we've got this straight. We should keep around two firms whose combined bailout cost will easily dwarf that of all other financial firms combined during the crisis? We should continue to tolerate firms that had come under fire for significant accounting manipulation even before the mortgage market collapse drove it out of business? We should just look past these firms' culture of failure, because DC will lose some high-paying jobs if we don't. Through this logic, we should also forget about deficit reduction, because spending cuts will also hurt DC.

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So perhaps we should have also have saved Enron, because it had 22,000 employees and Houston's economy would have been hurt without it? Oddly, no one was making this argument back in 2001. It's hard to know why for sure, but it probably has something to do with the fact that it's an insane argument to make. It's like a woman in a curable stage of breast cancer choosing not to have a breast removed and dying 30 years prematurely because she worried about how it will make her chest look while ignoring the fact that the procedure would save the rest of her body.

In November, the DC had an unemployment rate of 9.8%, which matched the national rate. That's definitely not great, but it also isn't any worse than average. The area happens to be one of the few where housing values have remained fairly strong, thanks to the ever expanding role of the federal government. Last year a pair of health care and financial regulation bills were passed that will also result in hundreds or thousands of new federal jobs. Is DC losing some jobs really so dire an outcome that it should supersede the desire for a better, safer housing finance policy that might exclude Fannie and Freddie?

Instead, net economic benefit of or harm to the U.S. should be considered when determining Fannie and Freddie's fate. Any jobs "lost" by winding down the firms will be created elsewhere when the private sector is forced to find new, innovative ways to make housing finance policy work without the companies' presence. Whether those new jobs materialize in the skyscrapers of Manhattan or the once-cradle of the mortgage market in Southern California (which have unemployment rates of 9.1% and 12.9%, respectively) doesn't really matter. Whatever framework provides the safest, strongest housing market and overall economy should be responsible for deciding Fannie and Freddie's fate. If that hurts DC a little, it will help everywhere else a lot.