The federal financial triangle

As odd as it may seem to us now, under the National Banking Act from 1863 to 1913, local banks with national charters were the official issuers of U.S. currency, and the government had no central bank. Hundreds of national banks in towns and cities all across the country were issuing dollar bills. They were replaced in this essential role by the Federal Reserve Banks under the Federal Reserve Act of 1913.

Consistent with their responsibility as the issuers of U.S. paper money, national banks were prohibited during this period from making any real estate loans at all. Today, in contrast, the Federal Reserve is a huge investor in real estate loans. It owns over $1.1 trillion of them — and keeps buying more — in the form of mortgage-backed securities (MBS). This would have greatly surprised and highly displeased the authors of the Federal Reserve Act.

But don’t worry about the credit risk of these mortgage loans: the MBS the Fed keeps buying at the top of the market are guaranteed by Fannie Mae and Freddie Mac. Whoops: Fannie and Freddie both went completely broke, suffering staggering aggregate losses of $246 billion, which wiped out all their capital and a lot more.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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