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 .