Freddie and Fannie have it both ways

Since neither the market nor the state checked their growth, they were able to swell extravagantly. (Regulators might have reined the companies in, but, thanks in part to ardent lobbying by Fannie and Freddie, Congress failed to provide them with sufficient power to do so.)

The result of all this was that the companies reaped the rewards of the private sector while enjoying the security of the public sector. Seemingly insulated from all harm, they became reckless. They constructed a giant pyramid of debt on a very small base of capital (eighty-one billion dollars, by the most recent publicly available figures), and by May, 2008, either owned or guaranteed more than five trillion dollars in mortgages.

As a result, even though just a small percentage of Fannie’s and Freddie’s mortgages are delinquent, the potential losses are huge. That’s why, in recent weeks, investors finally lost faith in them.

Whatever their sins, Fannie and Freddie clearly couldn’t be allowed to fail, but that’s no argument for letting them go on as they are. Either they should be forced to make it as private companies or they should be nationalized.

Given that their business depends on the promise of government assistance and that their current state remains woeful (despite an upturn in their fortunes late last week), nationalization seems more sensible. If Fannie and Freddie are going to run up a tab and stick taxpayers with the bill, why should shareholders profit?

Beyond that question, though, is a more important one: Do we need Fannie and Freddie at all?

Their supposed reason for being is that their ability to borrow money at low rates lowers borrowing costs for homeowners. But a paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

More important, if the last few years have taught us anything, it’s that homeownership is not an unalloyed economic good, and that we should be cautious about using gimmicks to make it more attractive. The government already offers homeowners a subsidy, in the form of a mortgage tax break. Given everything else we could be spending taxpayer money on, does the government really need to be in the mortgage-buying business, too?

Also in msnbc.com business Answer Desk: The risks of investing extensively in gold Your Career: The repercussions of expressing your faith Interactive: 10 cars we’re looking forward to in 2010 ‘Reaching out’ and the other worst buzzwords of the year   Video: Existing home sales make an unexpected jump

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