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.

Read the full text of the article on The American .

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

We still don't know how many people Obamacare enrolled
image The war on invisible poverty
image Cutting fat from the budget
image Speaker of the House John Boehner on resetting America’s economic foundation
AEI on Facebook
Events Calendar
  • 22
    MON
  • 23
    TUE
  • 24
    WED
  • 25
    THU
  • 26
    FRI
Monday, September 22, 2014 | 2:30 p.m. – 4:00 p.m.
Policy implications of the new US labor market normal

We welcome you to join us as a panel of economists discuss US wage and price prospects in the coming months and the implications for the Federal Reserve’s current unorthodox monetary policy.

No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.