May 10, 2021

Judge Glock on The Origins of the US Mortgage Market and Its Evolution to the Present Day

Early 1900s agrarian society helped shape the American mortgage market, leading to a government policy response that has had a lasting impact to this day.
David Beckworth Senior Research Fellow , Judge Glock

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

Judge Glock is an economic historian, a scholar at the Cicero Institute, and a returning guest to the podcast. Judge rejoins Macro Musings to talk about the origins of the US mortgage market as detailed in his new book, *The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913-1939*. David and Judge also discuss the emergence and evolution of the national US mortgage market, the price parity movement, the history of federal land banks, and more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu.

David Beckworth: Judge, welcome back to the show.

Judge Glock: Thanks so much for having me again, David. It's a real pleasure

Beckworth: Well, I'm looking forward to our discussion today about this book, but this is your second visit to the show. And we had an earlier discussion on a topic that's closely related to this book, same period. And that discussion was on a doctrine called the Riefler-Keynes Doctrine, which I found really fascinating for two reasons. One, it showed that the Federal Reserve actually was thinking in the '30s during the Great Depression about long-term interest rates kind of like they are today in the QE programs. But more importantly the second reason is because, what you show really undermines what is viewed as the conventional wisdom of what was the Fed thinking. I mean, most economic historians think the Fed could have done a better job, so what handcuffed them? And the standard story is the Real Bills doctrine. So maybe you could walk us through, kind of summarize that paper and then use it as a segue to move into your book.

The Influence of the Real Bills Doctrine

Glock: Yeah, absolutely. So like you said, the dominant view going back decades is the Federal Reserve failed in the Great Depression, basically failed to keep the economy going on a stable path and a stable amount of total nominal gross domestic product because they were obsessed with the Real Bills Doctrine. And the Real Bills Doctrine said, "Well, it doesn't really matter what the Federal Reserve does in terms of interest rates or this, that, and the other thing, as long as they're discounting, lending money on only short term merchants bills," usually less than 90 days deal or whatever it was. Which was the whole reason the Federal Reserve was created to kind of add liquidity and lend money on these short-term bills, "The economy is going to be fine." Because it's the sort of needs of trade argument.

Glock: As long as people are bringing the bills into the Federal Reserve, then clearly there is a demand for that and if they aren't bringing enough bills in then the Federal Reserve doesn't need to worry, then the needs of trade are down and it doesn't have to increase the money supply or do whatever else is necessary. And so the problem is that from my research, that didn't seem to be the real view of the Federal Reserve in the Great Depression.

Glock: And if you read the writings of people like Eugene Meyer and even some of the transcripts of the local Board of Governors meetings and so on, people like the New York governor of the Federal Reserve, George Harrison said pretty clearly, "No we're focused on long-term interest rates, we're focused on bonds. We're focused even on stocks, and we're focused on mortgages. And our whole job at the Federal Reserve is trying to get more money into all of these long-term markets, because these long-term markets are really what determines the shape of the economy." And frankly, that's what they tried to do.

Glock: The Federal Reserve from ‘29 to ‘33 devoted most of their efforts to try to reduce the interest rates on these other sorts of assets. And this book too tries to show that that interest in long-term assets, most importantly, mortgages was actually dominant, not just in the Federal Reserve, but kind of at the politics at the time, from the Woodrow Wilson administration through FDR. Basically, one of the foremost political issues was, how do we get interest rates down on mortgages? How does the government support mortgages both for farmers and for builders, and how can that help the entire economy grow and be stable? And I tried to show that that really reshaped a lot of what the federal government did in the first half of the 20th century.

Basically, one of the foremost political issues was, how do we get interest rates down on mortgages? How does the government support mortgages both for farmers and for builders, and how can that help the entire economy grow and be stable? And I tried to show that that really reshaped a lot of what the federal government did in the first half of the 20th century.

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Beckworth: And that is super fascinating and speaks to the saying in Ecclesiastes, "There is nothing new under the sun." That this idea of lowering long-term interest rates, which has again been the focus of QE back in the previous, in 2008 crisis, as well as the one more recently. So I encourage folks to get out there and to read his article, we'll provide a link to it in the show notes, as well as his book. And again, for those economic historians out there, Judge's work should really give you pause about your belief and the Real Bills Doctrine being the dominant view during this time.

Beckworth: Okay. So let's move forward in into your book. And your book obviously is tied to what was going on in that first paper you just covered, but maybe we should motivate this discussion since it's about the mortgage market, by looking at the current state of the mortgage market. Why is this such an important topic today? Let's make this relevant. I just want to throw a few stats out there, and if you want to comment on them Judge, you can. But I find it useful to go to the Urban Institute's *Housing Finance At A Glance*, it's a monthly report, it's filled with wonderful charts.

Beckworth: Provides a nice summary of the US housing market, and particularly US housing finance, which is very unique compared to many other places in the world. So just a couple of summary stats to start this off. The value of the US single family housing market in the US is at $33 trillion. Very large number there. And 11.5 of that is in debt, the rest of it is an equity. And there's a lot of other things I could point to in this chart, but probably one of the most striking things is that most of mortgage originations are through either GSE, Fannie and Freddie, or the FHA, or the VA, almost all of it is being done through that.

Beckworth: So majority, I mean, a large amount is being done through these government sponsored enterprises. And the other kind of interesting fact I'll end with this, is that the 30 year fixed rate mortgage is still the key when it comes to mortgage products. I'm looking at a chart right now that it's about 80% of all mortgages that are initiated. I mean, this chart goes back from 2000 to the present. It's just the 30 year is the key, and I mean, there's just nothing like it out... I mean, there's 15 year, there's adjustable rate, but they're small in terms of comparison. And the 30 years is unique to the United States, is that right?

The Current State of the US Mortgage Market

Glock: The version of it that we have, which is a 30-year fixed nominal rate is, although there occasionally pops up in other countries, the dominance of it is unique to the United States and my book tries to get exactly about why that is. And then you kind of hit on it with the statistics you read about the percentage of the mortgage market that's supported by the Federal Government. As you mentioned, the FHA and especially the government sponsored enterprises, GSEs, Fannie and Freddie, and Ginnie Mae as well, they support the majority of this $10 trillion plus mortgage market out there.

Glock: And they are the ones that were able because of that government support to create what otherwise would be a fairly risky product for lenders, which is a nominally rated mortgage that's fixed for 30 plus years. And that's a very risky proposition for any lender to make, especially in a time of macroeconomic turmoil. But I try to show that the government created a lot of entities and you just rattled off some of them that were created in the first half of the 20th century. And there were many more, and that's kind of motivated me to do the research into this book.

Beckworth: Now, you've mentioned there's a barometer that looks at this type of off-balance sheet financing. So maybe speak to the audience about that.

Glock: Oh yeah. I don't think they've updated for a few years, but the Federal Reserve Bank of Richmond, for a few years after the financial crisis of 2008, kept what they called a bail-out barometer, which was trying to show what percentage of the US financial market is basically explicitly or implicitly guaranteed by the federal government. And the numbers they kept coming up with were around 60%. This is tens of trillions of dollars. And a large portion of that was of course mortgages that was Fannie Mae and Freddie Mac and FHA and the rest of it.

Glock: But another large portion of that was things like, of course, the Federal Deposit Insurance Corporation, the FDIC, which is guaranteeing a lot of those banks’ deposits and other things like the Federal Reserve’s sort of implicit guarantees of money market funds or other short term institutions in lending activities. And you've seen actually in the recent 2020 Coronavirus bail-outs, those sort of implicit guarantees sort of expand. We've seen a lot of the corporate bond market be supported by the Federal Reserve and local municipal debt even, and continued extra support for Fannie and Freddie. So the US government has long been intimately involved in supporting the financial sector. And most of that is dealing with mortgages most importantly, and most of that dates back to the 19-teens, '20s and '30s.

The US government has long been intimately involved in supporting the financial sector. And most of that is dealing with mortgages most importantly, and most of that dates back to the 19-teens, '20s and '30s.

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Beckworth: One of the points you bring out in the book, which is still with us today is this tendency for the US government to do a whole lot of activity off the books or off its balance sheet. So even though we have a certain dollar size for the US budget, and we talk about debt and deficits, there is a far bigger number off balance sheet. And I guess one takeaway from this is we have a rich tradition in doing off balance sheet activity going back to these banks we're going to talk about in a bit. And I bring it up because last year I was making some comments on Twitter, some other places. I was being very critical.

Beckworth: Congress is effectively pushing its job onto the Fed's balance sheet. I mean, there was a pandemic, there was a response that was needed, but Congress should have been doing it in my view. There should have been an emergency response, but Congress should have been at the heart of it. Instead, the Fed was called upon to do it, for many reasons, but one of the implications is that the price tag is smaller because the Fed's doing it. And someone correctly pointed out to me, "Calm down, Beckworth, this is something we've been doing for a long, long time." And they pointed out the GSEs going all the way back to the early 1900s.

Beckworth: So, let's go ahead and jump into your book. You've kind of painted the picture. This is an important question and topic for us today. So it's good to know the origins of it. And you mentioned there's a lot of things that have happened in early 1900s, up to the Great Depression, that's what your book covers. But just again, just to highlight a point you make in the book before we jump into it, the government did a lot more through these agencies than it did through some of the official changes during the Great Depression.

Beckworth: And I'm going to just read a quote that highlights this from your book, and I believe this is on page four. We'll see what the final book looks like. I'm reading from the proofs that Judge sent me. But here's what you say, "Although the first half of the 20th century is often called the age of reform and innumerable historians have traced the new programs from minimum wage legislation, to food inspection, to Social Security that reshaped American economic and political life in this era, the government reforms to ensure balance through finance rivaled, or perhaps surpassed in scale, the more well-known programs. By the beginning of World War II, the government was surrounded by an array of semi-public financial institutions, unimaginable just 30 years earlier.

Beckworth: The government supported at that time, the Federal Reserve banks, Federal Land banks, Intermediate Credit banks, Reconstruction Finance Corporation, Federal Home Loan banks, Home Owner Loan Corporation, the Federal Farm Mortgage Corporation, the Federal Deposit Insurance Corporation, the Federal Housing Administration." And you go on, and again, you make the point that all of these agencies, these GSEs, when you look at the scale of them, they far surpass the visible government programs that people really talked about. So these were kind of in the background, right? They're not as well noticed, at least immediately.

The History and Scope of Government Sponsored Enterprises

Glock: Exactly. And so I think I mentioned in the book, if you look at that 1939 or 1940 Federal budget, it was about $9 billion, which was still a small relative to total gross domestic product, even relative to today. But if you look at these other programs, how many assets they had on their books, it was about $12 billion. And so these were significantly larger in their total amount of holdings and the entire Federal budget of the period, it's a little bit of a stock versus flow question all the rest of it. But to give you a scale, this is a double digit percent of GDP being supported by the federal government and these numerous entities.

Glock: And yes, we didn't think of them at the time because they weren't on the budget. They got submitted to Congress, they didn't have direct costs to most of the people at the time. Even their debt didn't seem to be on the government books. But as we now know, some of those programs, including things like the Federal Savings and Loan Insurance Corporation and Fannie Mae blew up decades later and ended up costing taxpayers hundreds of billions of dollars, so they can't have real consequences.

Glock: And yeah, in the first half of the 20th century the government, even though 1912, basically just did a typical taxing, and spending, and handing out money. As you mentioned that list, by the 1940, it had this amazing array of financial corporations where it was supporting a lot of financial assets. And as I kind of explained in the book, if you look at it, the biggest safety net, if you want to say, created from the first half of the 20th century is this safety net supporting all these different financiers and banks. And that seems to be by orders of magnitude larger than Social Security and some of the other programs that are more typically discussed.

As I kind of explained in the book, if you look at it, the biggest safety net, if you want to say, created from the first half of the 20th century is this safety net supporting all these different financiers and banks. And that seems to be by orders of magnitude larger than Social Security and some of the other programs that are more typically discussed.

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Beckworth: Yeah. It definitely puts things in perspective. And you make another point in your book that when we talk about the financialization of the US economy, and that has received a lot of attention, and it's true. I mean, people love to go work on Wall Street, high returns to doing that. But the financialization of the US economy is not just a recent phenomenon, what we just described suggests it was something that was huge back in the early 1900s going up to the Great Depression period. So the financialization of the US economy was already in place by this point, is that fair?

Glock: Yeah. And if you look at just the numbers kept on the percent of GDP that were devoted to finance, they actually hit a temporary peak in the 1930s, about 6% of all GDP, a number they didn't hit again until the 1980s. And so there was definitely a focus on trying to revive finance. We often think of people like FDR, or Woodrow Wilson as been sort of railers against finance, but in short both parties, both the presidents from both sides were very much interested in supporting more finance.

Glock: Now, in and of itself, there's nothing wrong with that. There's a great economic literature going back to King and Levine and all the rest about more finance and more growth. But I think most people agree the sort of this finance that's guaranteed by the federal government can lead to a lot of problems when the federal government has to pick up the downside and the private sector gets to pick up the upside. And we certainly saw that in numerous crises from the Great Depression till today.

Beckworth: Okay. Well, let's jump into the historical outline of your book, and let's go to the origin story. Every story has a beginning. So where does your book story begin?

The Origins of *The Dead Pledge*

Glock: I probably got some flak from my publisher and others, by having it begin in the 17th century with the birth of bankers in England during the English Civil War. But if you look, I was trying to bring it so far back to show that there was this long evolution where commercial banks, banks as we often think of them, which is banks that take in deposit, usually lend money out for short terms. And they grew in sort of tandem and often in conflict with this other idea of the land banks. Land banks were banks that lended mainly on mortgages and that lent for the long-term.

Glock: And I describe how some mystical group, called the spiritual brotherhood in the 1650s came up with this idea and said, "Look, everyone knows we have this very valuable asset, land. That's sitting all around us, but we can't turn it into finance. And if financial banking becomes a significant part of the economy, farmers, and all the rest who depend on land feel left out. And so we need to create some sort of financial institution that allows us to unlock the value of this land."

Glock: And one of the things they were wrestling with for the next 150-200 years, "Well, how do we do that?" Because the problem is, and I pointed this out in Adam Smith's, *Wealth of Nations*, he has a discussion of the land bank idea. Because his patron the Duke of Buccleuch, I think it's called. Please Scottish pronouncers, you can rail against me on Twitter or elsewhere for that. But the Duke had run a land bank that was lending on mortgages in Scotland and it went bust, created a financial panic back in 1772.

Glock: And because of this failure, Adam Smith rewrote parts of the *Wealth of Nations* to say, "Well, look banking itself doesn't work with mortgages." Mortgages last for decades, potentially or five years, at least at the minimum. And a bank can only accept money on demand. You give the deposit, very short term, 60, 90 days, so forth. So there's no way to sort of square the circle and get mortgages into banks. And he said, "Commercial banks, all the rest of them should avoid mortgages. Other individuals should only be the people to loan a mortgage." As he goes into this sort of metaphor in the *Wealth of Nations*, how a bank should be like a pond where water is always flowing in and out constantly.

Glock: And that one became the basis actually for the Real Bills Doctrine, the Adam Smith theory that these banks should focus on short-term deposits, short-term lending, the rest of it. But this outrage, all these farmers, what are we going to do with all this land? We can't use this on collateral for banks where all the money is. And for most of the 19th century in America, mortgages were illegal for banks. And all of the banking, magazines, institutes, whatever said, you should never... the whole point of banking in fact, it's to try differentiate these real bills from these long-term mortgages.

Glock: And what I show in my book is, thanks to the farmers’ advocacy and these new corporations, the American banking system kind of turns into a mirror image of its previous self. While once banking with mortgages was illegal, if you look up to the 2008 crisis and beyond it, more than 50% of all bank assets became mortgages. So you have this transformation of, how do you get these short-term deposit taking banks into the mortgage market and the answer they come up with is, "Well, you just spread a lot of government guarantees all over those." And that helps convince a lot of these bankers they can invest in them with confidence.

What I show in my book is, thanks to the farmers’ advocacy and these new corporations, the American banking system kind of turns into a mirror image of its previous self. While once banking with mortgages was illegal, if you look up to the 2008 crisis and beyond it, more than 50% of all bank assets became mortgages. So you have this transformation of, how do you get these short-term deposit taking banks into the mortgage market and the answer they come up with is, "Well, you just spread a lot of government guarantees all over those." And that helps convince a lot of these bankers they can invest in them with confidence.

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Beckworth: So, this is fascinating in the case of your book, your story begins in the US in the 1913 with the creation of the Fed. But to what extent did the agrarian revolt in the late 1800s also play into this? There's a rich story there, and I've actually done a little bit of work on this. And as I recall, one of the big things they complained about was a deflationary period that they viewed their terms of trade as not fair. Everything they were selling was getting lower and lower in price and what they faced was higher. I know there's been a huge literature on this, did they really have deteriorating terms of trade or not? And it's one of these things, it depends on what study you look at. And maybe there's a consensus, I don't know, you can share with me. But nonetheless this political fervor during this period, did that feed into this movement?

The Political and Economic Effects of the Agrarian Revolt

Glock: Oh, entirely. And so, yeah, as you mentioned, there's this long literature going back to the 1980s with Snowden and Eichengreen writing and yourself and others writing about how... Well did the farmers really suffer in the late 19th century, how bad was it because it was a deflationary period? I think people agree that deflation was difficult with farmers because farm good prices are more elastic, they tend to change more rapidly than other prices, they're less sticky. And one of the things my book tries to bring out is this kind of ideology they created beginning in that period, but going into prominence later of this balanced ideology. Well, the point of the government is these sectors are imbalanced, farming and industry, and later, well, certain kinds of industries, light and heavy industries. And the government's job is to kind of put its hand on the lever and balance them most importantly by supporting finance and whatever group they feel is left behind.

Glock: And yeah, the populist obviously made a big to do about this and for good reason. A lot of them were losing farms. They were losing farms to mortgages that were priced in previous times. Now, mortgages were often more short term they were today, five years. So it wasn't as difficult as the current 30 year mortgage with different nominal rates and you couldn't repay in five years and all the rest of it. But yeah, one of the things I point out is that everyone mentions the populist said like, "Oh they wanted to coin silver as well to increase the price level. And maybe they wanted this new kind of financing on crop warehouse receipts, and all the rest of it." But if you look at them and their 1890 platform, they said one of their major demands was for a land bank.

Glock: We need to create a bank the government actually owns to lend money on mortgages. And they were kind of laughed out of the respectable society with this. And even most of the political discussion moved on very quickly. But as I showed the government's still trying to find a way to answer that demand, of farmers for cheaper mortgage debt and mortgage debt that could be maybe more flexible in nominal long-term and could be refinanced, which was important demand to them all in case a deflation happened again. And so, the way they kind of squared the circle and they figured this out was yeah, we don't want a government land bank per se. We don't want something to happen, frankly like happened in the 18th century America which I'm sure if you look at the colonial currencies, almost all of them were based on land banks.

Glock: It was the state of New Jersey and Massachusetts and the rest of it said, "You mortgage your land to us, and we're going to give you a hundred pound note for it, 50% of the value of the land." And everyone knows that these became kind of… The colonial currencies became bywords for inflation down the ages. They were overprinted, they failed, the government tended to show favoritism and the rest of it. And so the government [inaudible] and the politicians said, "Well, how can we fix this, how can we not make it a government land bank? But something that still helps the farmers get financed."

Glock: And the sort of solution they hit upon, which later on people had to pay the price for, is this government sponsored enterprise. Why don't we create an organization that's privately owned but supposedly free of politics, but has that government support and subsidy kind of undergirded and hopefully that will allow the best of the private and public worlds. But as I mentioned before, maybe it allows both the kind of politicization of those institutions, and it also allows the government to pick the downside and private groups to pick the upside of those financial debts. And so that's kind of how the story plays out. Most importantly, with the Federal Land Banks, which I can go into if you care.

Beckworth: Yeah, just one more question about the historical context, because this is something that fascinates me. So you have this deflationary period, really from the end of the civil war up until like mid 1890s, right? And at that time, I believe that there’s some gold discovery, some things that kind of changed the regime into an inflationary regime. So you have this 30 year deflationary period, which it's a nice tailwind to this movement, I imagine, it's a great compelling story. Did the change in regimes to an inflationary one, did that inflationary regime take the wind or some of the wind out of their sails, did it kind of damper some of the support maybe for this direction that they were headed?

The Inflationary Regime Change and Federal Land Banks

Glock: Well, it definitely took a wind out of the sails of the sort of greenback or inflationary movement, which dominated a lot of the farmer discussions in the 19th century. If you look at the time when Woodrow Wilson was proposing and creating the Federal Reserve, he didn't propose it. And even the more radical sort of farmer groups didn't propose it as a way to inflate the currency. In fact, they tried to avoid that discussion as much as possible. So it took a lot of the wind out of the sales of that side of the movement. What it did do though, is at the same time the proportion of the economy devoted to finance was growing, at the same time, the financial sector itself was providing more support to industry. It made the farmers exclusion from that ever more important and salient.

Glock: So as these banks are doubling and growing in size, especially in the inflationary early 20th century, the farmers are more and more angry at their exclusion. As I mentioned up until the 1913 Federal Reserve Act, banks still couldn't lend on mortgages. One of the very minor reforms, which I mentioned in 1913, the farmers got into the Federal Reserve Act was allowing normal commercial banks to lend on mortgages for the first time. And the very fact the government was saying, "Hey, we're going to create this sort of institution, these Federal Reserve banks that are supporting the commercial sector and the manufacturing sector and the rest of it," made farmers’ ears perk up and say, "Wait, wait a second. We need our sort of support too, and how are you going to do that?" And that proved much more complicated. And that led to the creation just three years later of these Federal Land banks.

Beckworth: Well, tell us about that. That's an important part of the story.

Glock: Yeah, so the Federal Land banks were created in 1916 basically in the model of the Federal Reserve, there were 12 banks, they were jointly liable for each other's debts. The difference was instead of lending on short-term notes or whatever, and having the commercial member banks be the main undergirding the system, it would create these new banks, these kind of non-profit cooperative associations that would give loans to their local members. And then the Federal Land banks would package these mortgages to mortgage backed bonds. So this is one of the origins of the long-term government mortgage backed bonds and these Federal Land banks. And the government did not want to say this was a government agency or an institution and frankly, in that sense, it was similar to the Federal Reserve, which originally weren't government institutions.

Glock: And there are notes, in fact the Federal Reserve notes weren't even legal tender. It was just supposed to be you accept them kind of as you will. But the federal government in 1913 under Woodrow Wilson had guaranteed the debts of the Federal Reserve banks that said, "We're going to make sure all the notes are as good as gold. The federal government will step in, if for whatever reason, the Federal Reserve banks actually go bankrupt." And the farmers said, "Hey, we want the same deal." Even though, instead of dealing with these relatively unrisky short-term loans and merchant bills that kind of move in and out of banks relatively quickly, we're dealing with these very risky, back then it was even 40 year mortgages that the Federal Land banks were making and the government didn't quite do that.

Glock: They didn't quite guarantee all the loans, but they gave a wink. They gave a few little hints that these Federal Land nanks were more than private institutions being chartered by the government. They made things like, well they were tax exempt, the first tax exempt corporations in the US and the government could use their bonds for these special trust funds that the government bought for say, employees or others that were previously restricted to only government bonds.

Glock: Well, and we also can deposit a little money in the banks if they ever get in trouble. And so you hear a lot of rhetoric around the passage of the act in 1916, saying, "Look, the government's going to put itself in back of these banks." And you see a lot of congressmen saying very clearly, "I'm going to buy the bonds because I know the government is going to support them, and furthermore, I know my banks that I'm often a member of, occasionally director, occasionally even the president, are going to buy these government bonds, one because they're tax exempt and two, because the government is going to support them." And so leads to this land bank boom, and these really start exploding. And by the end of the 1920s, by most measures, they would become the largest banks in the United States.

Beckworth: Okay Judge, so that's the beginning of the Federal Land banks. You mentioned in chapter three how their role expands though, can you tell us a little bit about that?

Expanding the Role of Federal Land Banks

Glock: Yes, So the sort of deflationary issue that you mentioned earlier kind of comes to a head again in the 1920s. So after the federal government and the Federal Reserve was inflating the currency through the end of the 19 teens, a lot of the gold inflow from the rest of the world, scared by confiscations in Russia and World War I abroad led to an expansion in the currency in the US. But by 1920, the Federal Reserve really started to sort of try to get a handle on the economy, hiked up interest rates drastically, pulled back the money supply. And you got a very drastic deflation very suddenly. And the farmers were of course outraged about this because again, farm crops tended to be the first to sort of change in price. They were more elastic, less sticky than other prices. And so their terms of trade with the rest of the economy got worse.

Glock: But they were also outraged because the federal government had just been encouraging a lot of banks to make these long-term high nominal rate mortgages, and a lot of other debts. And a lot of local non-government backed banks were making a lot of similar loans to farmers that were now going into delinquency or default. And so the Federal Land banks now had this opportunity as many sought to support the rural banking system, even though the original motivation of them was supposedly about how can we protect farmers, and how can we help them get access to finance? If you look at all of the members of the Federal Reserve bank, they tend to be bankers and often tend to be continuing bankers. Some of them will testify to Congress that, "Well I get a few loans from my own Federal Land bank, and my bank is in the same location as the loan office, the Federal Land bank and I send guys to one or the other, depending on how we can best serve them."

Glock: But these bankers say, "Look, the Federal Land banks offer a great opportunity to take bad loans off my books." You lend a thousand dollars to a farmer on a mortgage and that farmer can pay back his loan to the local bank. And a lot of the Federal Reserve banks, Federal Land banks, and a lot of Congressmen say this very explicitly, this is the goal. We're trying to get these bad, or what they call them frozen assets, kind of the equivalent of the 21st century toxic assets, off these banks’ books by giving these new mortgages. And some of these mortgages obviously, were given to farmers in very dire straits, but there was also a lot of politicization involved in this.

A lot of the Federal Reserve banks, Federal Land banks, and a lot of Congressmen say this very explicitly, this is the goal. We're trying to get these bad, or what they call them frozen assets, kind of the equivalent of the 21st century toxic assets, off these banks’ books by giving these new mortgages. And some of these mortgages obviously, were given to farmers in very dire straits, but there was also a lot of politicization involved in this.

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Glock: I mentioned the Federal Land banks had to acquire a whole report in the 1930s of every loan that was given out to a congressman, senator. I think everyone up to their first cousins. So they really had to go to the geological tables to get details, but they kept track of it for the good reason. They know they wanted friends at their side in Washington, and you'd see people like a representative Bankhead, or Senator Bankhead from Alabama. They had multiple loans that were in default and weren't paying off and against the rules that the Federal Land banks, the banks kept giving them. And you can see it too in the hiring side of this.

Glock: You had a bunch of letters from congressmen. I think there was a great letter from the Federal Land Bank board in DC that said, "Well, can you hire one of the Senator Fletcher's brothers?" And they said, "Oh, we're just being the local land banks and we're just inundated with his kin. We can't hire everybody this guy happens to be related to." And then the board says something like, "Well, if we can make any friends in Washington, we should very, very, very..." I think maybe four verys, much try to accommodate them.

Glock: And so, this led to a number of problems, one that political pressure to make these politicized loans, two the political pressure to hire people that were maybe likely to be a little more friendly in their appraisers, the appraisers that were evaluating the local farms. And this kind of led to a short-term blow up. By ’26, ’27, a lot of these banks were in trouble. The Calvin Coolidge Administration had to fire a bunch of members of the board. They brought in this new guy, Eugene Meyers, who was previously a major stockbroker and a Washington power player, and then he becomes a major force trying to revive the Federal Land banks and eventually becomes, also not unimportantly, the chair of the Federal Reserve Board in Washington.

By ’26, ’27, a lot of these banks were in trouble. The Calvin Coolidge Administration had to fire a bunch of members of the board. They brought in this new guy, Eugene Meyers, who was previously a major stockbroker and a Washington power player, and then he becomes a major force trying to revive the Federal Land banks and eventually becomes, also not unimportantly, the chair of the Federal Reserve Board in Washington.

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Beckworth: Okay. So the next thing that happens as we follow through your book, is this movement you call, the price parity movement in the 1920s. So kind of along the same timeline here in that decade, but maybe for the sake of our listeners, and you've mentioned it already, but maybe summarize again the basic idea of the economic balance view or framework that was so popular, then how it kind of grew into a price parody framework.

The Economic Balance Framework and the Price Parity Movement

Glock: Exactly. So the balanced economy ideology I try to show, it was extremely prominent the first half of the 20th century, and really hasn't received much attention from historians or economists or others. But the basic idea behind it is that we conceive or they conceived the economy as these sort of large sectors that traded with each other. It was farming and industry, or it was light industry and heavy industry. And we need to take these sectors in some sort of balance, either as proportion of population or as proportion of their total income, relative these other sectors, if you're going to expect the trade to continue and the economy to keep growing, that's the basic idea behind balance. And now the financial side of that is a lot of what motivated these Federal Land banks. People said, "Hey look, the proportion of the population's farming has been decreasing for decades." Basically since the creation of the United States, but still, we used to be 50% of all the workforce in 1880 and by 1920 we're about 30%. And we have to stop that, we can't have an economy with no farming.

Glock: For a lot of people that was absurd, just like in the 1980s or 1990s, you would have heard a lot of people say, "Oh, we can't have an economy without manufacturing." That's what the economy does. Everything else is just sort of middlemen on top of that. And so you had these people say, "How can the government do that, if you have this imbalanced economy, how can the government sort of bolster up those sectors they're behind?" And originally that was all involved finance. They think, why is the farm economy in such dire straits, or why are people leaving the farms for the cities? You see a lot of rhetoric at the time, well they're leaving because of these terrible high price mortgages, and they can't get finance and they can't buy the land, they can't finance their crop planting or buy a new barn and the rest of it.

Glock: And so, the Federal Land banks were the attempt to sort of support that financial side of it. You had this financial inequity. And the finance was from the government land banks where elsewhere was going to bolster up that farm side of the economy. Now what you saw in the 1920s though, as I mentioned that sort of deflation that was happening especially for crop prices is you had this new ideology, what we need is balance of prices. You mentioned the terms of trade in the 19th century with farmers and the rest of the economy, and the populist movement at the time had a lot to say about that. But in the 1920s, it became major political movement in both parties. Well, the government can set the price. If we're worried about the terms of trade, let's not just inflate the whole currency or do X, Y, or the other thing, let's just make sure the farm price is higher than it's been recently.

The Federal Land banks were the attempt to sort of support that financial side of it. You had this financial inequity. And the finance was from the government land banks where elsewhere was going to bolster up that farm side of the economy. Now what you saw in the 1920s though, as I mentioned that sort of deflation that was happening especially for crop prices is you had this new ideology, what we need is balance of prices. You mentioned the terms of trade in the 19th century with farmers and the rest of the economy, and the populist movement at the time had a lot to say about that. But in the 1920s, it became major political movement in both parties.

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Glock: And that's the price parity movement. And this leads to the idea that farm prices should have the same level as they get relative to industrial prices they did in 1930, right before World War II. Oh, sorry, World War I. And this has become the very basis of American foreign policy for the next century. If you look even til today, you'll have these things, they'll talk about the parity price and they'll set the price of corn or whatever, and the government will buy up the extra corn to make sure that the price parity is still the same relative to this absurd 1913 price or so on. But what I show is that when this first started, the government policy of these price parities started in the Herbert Hoover administration with this Federal Farm Board which was supposed to buy up excess crops and hold them until the price is revived.

Glock: And one of the big motivations there too was financial again. So the financial side of it said, "Look, all of these rural banks again are suffering because the crop prices are low, the farmers can't pay off their loans. And so if we bolster the farm price we can help these rural banks get out of trouble." And as I mentioned in the book, the rural banking crisis in the 1920s was not one to skip, the 1920s, it saw more bank failures than any previous decade in American history. We don't think of a lot of them, they were very small rural banks, but it was in the thousands. And this was even before the 1929 crash. And so they said, "Well, this price parity is going to help bolster them up." And as this Federal Farm Board was working in the Herbert Hoover Administration they had a lot of explicit days where they said, "Listen, we're going to buy up every cotton, basically cotton bale in the United States in November, 1930, because we’re seeing a crisis in the southern banking system based on cotton. And without it, if we didn't do this, the banks are going to fold."

Glock: So this is another area, sort of like the finance side of it, where you saw a lot of power from the financial sector, sort of take these ideas that were originally meant to support farmers and use them as another way to bolster finance. But what we saw like the Federal Land banks is when you're supporting a lot of prices that may be supply and demand are showing should go down, the government might take losses. And so the Federal Farm Board loses hundreds of millions of dollars goes bust in a few years.

Glock: The depression obviously makes sure and the overall deflation there make sure farm prices don't go up. And the government tries again to try to push the Federal Land banks back into this and say, "Well, okay, let's double down on this. If we could put even more mortgages out here, we can save these rural banks that are threatening the entire economy that are going to collapse. We can help the farmers get back on track and thus revive the whole economy and balance it again." So that's the sort of path they were going on as the Depression was hitting and all of these prices were collapsing.

Beckworth: Yeah. I was familiar with the attempts by FDR to keep output prices high, I think it's been pretty well documented, all the different agencies and attempts, farm prices, production prices, artificially capping supply. The stories of farmers slaughtering lots of pigs out in the country while people were starving in the cities, kind of a classic 1930 story. But what you show in your book is this thinking actually comes out of the 1920s. It actually is an idea to kind of just follow through into the Great Depression. So let's talk about the Great Depression, because you go on and I believe this is the period where this idea of supporting the farmers eventually migrated to supporting the city, supporting the urban environment. So talk us through that.

The Great Depression Transition Period

Glock: Yeah. So as I mentioned, when they expanded the sort of balance sheet of the Federal Land banks in the Great Depression and used them to sort of help bolster the rural banking system, the Federal Land banks started to be insolvent. And they then in January, 1932, Hoover, President Herbert Hoover got Congress to pass a special bail-out act. That gave hundreds of millions of dollars to these Federal Land Banks and he said this was only for the short-term liquidity issue and we only need to support them for a moment during the height of the Great Depression. What I show a little bit in this book and another paper I published in the Business History Review is that by all the contemporary accounts inside the banks, they were insolvent, they were incredibly insolvent and without the government money, they would have gone bust.

Glock: And so in this sense, you have the first actual bail-out of a American banking institution by the federal government, this is the sort of origin of American bail-outs. And when you talk about a government sponsored enterprise that at least puts that mortgage backed bonds, and it gets bailed out in a financial crisis, this might ring some bells obviously of 2008. And that was one of the main things I wanted to study when I got into this, because this becomes the origin of that sort of policy clearly. But as you mentioned, this migrated pretty soon into the urban sphere and one of the most shocking things is in January, the Federal Land banks get bailed out. They're insolvent by any measure, they seem to have been a bust.

Beckworth: What year was that?

Glock: This was 1932.

Beckworth: ‘32, okay.

Glock: Yes. And so just six months later though, you see the Federal Home Loan banks created, which are almost the exact mirror image of the Federal Land banks. They're 12 banks. They’re supported by these semi cooperative members, then known as building in loans later savings and loans. Of course, maybe many of your listeners will be familiar with the Bailey Brothers Building and Loan from It's A Wonderful Life, which still forms much of her image of this period. But that movie, that scene, if many of you remember the bankruptcy on that, it's the same problem that these mortgage sort of advocates have been talking about forever, that was also applying to urban mortgages. When you have Jimmy Stewart saying, "Your money is not here. You got this place all wrong, it's in Jim's house and John's house." And so on, he was talking about the same problem of illiquid mortgages that the farmers have been talking about forever.

Glock: When you have these short-term depositers, who can ask for their money back at any second and for what it's worth in the scene, Jimmy Stewart actually says, "Well, I can give you your deposit back in 90 days." Because a lot of these banks had clauses that allowed them to hold off. And everyone was shocked because they never actually enforced these clauses, but this was supposed to be the sort of thing to allow them to get that liquidity back. But this was the same problem, if your money's in this long-term house and you have this short term bank that's taking in deposits, how do you work that? And so when you saw a lot of building and loans go bust in the Great Depression, people said, "Hey, we have a model for this. We have the Federal Land banks. So let's create the federal home loan banks," which do almost the exact same thing.

Glock: Well, they buy up and issue bonds based on these local building and loan mortgages and they can give liquidity. If you're a bank in trouble, you’re Bailey Brothers and someone comes to you for your deposit, you can ship your mortgage off to the Federal Home Loan Bank and they can give you cash that afternoon and you can pay out your depositor and you can be safe. I mean, the surprising thing though, is that they weren't created, again just about six months later in 1932 after the similar institution was just bailed out and was incredibly insolvent. It was only because Herbert Hoover had hidden the real state of the Federal Land banks from the people in Congress that they didn't know that they were modeling this after a rather poor model perhaps, it was politicized and all the rest of it.

Glock: But they created that. And part of that was because this theory about balance had then, as you mentioned, migrated to the urban sector into the industrial sector and they say, "Hey, look," and this is true. If you look at the stats of the Great Depression in terms of what industries were collapsing it was the heavy industries, construction most of all. The whole economy was about 30% down from its peak, construction was 90% down. The heavy industries that were based on investment were 50, 60% down. They said, "Hey, look, there's this imbalance in the economy between this stagnant sector and this buoyant sector," which is the light textiles and consumer goods and all the rest of it. And this is, I mentioned when we discussed before in the Riefler-Keynes piece, that was sort of the motivation behind that.

Glock: That they say, "Hey, look, these sectors are depending on long-term debts are down. How can we bolster them, in construction most of all." And they all say, "Well, construction supports everything, it supports the lumber industry, the furniture industry, all these things that are particularly depressed in the Great Depression." They say, "Hey, again, we can create finance to do that." And if you look at just about everything Herbert Hoover did in his presidency, it was trying to give more support to the housing construction. From the Reconstruction Finance Corporation, they were supposed to buy it bad debts and mortgage debts to these Federal Home Loan banks, to encouraging the Federal Reserve to buy up long-term assets and to make mortgages.

Glock: That obviously failed because again, the country wasn't in great shape when he handed it over to FDR in 1933. But as they showed too, FDR basically took everything on this from the price parity movement, which we mentioned expanded into the Great Depression and made a much bigger part of it. He took the Federal Land banks and created the Farm Credit Administration that, which was this new massive, as some people called it at the time, super bank. And then he expanded a lot of the urban mortgage supports as well.

If you look at just about everything Herbert Hoover did in his presidency, it was trying to give more support to the housing construction. From the Reconstruction Finance Corporation, they were supposed to buy it bad debts and mortgage debts to these Federal Home Loan banks, to encouraging the Federal Reserve to buy up long-term assets and to make mortgages. That obviously failed.

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Beckworth: Yeah. The story you're telling definitely illustrates the danger of using this balanced view, because you can always find a sector that's not imbalanced. And you might start big and then you could, well, within that sector, you could find another sector, right? So you mentioned in the urban area, and it was the heavy manufacturing. But then the textiles, consumption goods, they were fine. Well, I could just see easily you drilling down to a more narrow or narrower slice until you hit your constituent group. So, let's go on to FDR’s… and you mentioned some of what he did and probably the best known, I think, story that comes out of this is, is Fannie and Freddie, the GSE. So what's the transition from the FHB to the GSE. So the Federal Home banks, I mean, you mentioned there's some change that takes place. So walk us through that. How do we get to Fannie and Freddie?

The Evolution from FHB to GSE

Glock: Yeah. So yeah, the story sort of culminates in the creation of Fannie Mae in 1938, which becomes again, most infamous for the collapse and the bail-out about 70 years later. So FDR took all these theories about the balanced economy and about the sectors that had fallen behind and he expanded the farm sector part of this. And if you look at his campaign originally, it's all about balancing the farm economy with the industrial economy and Roosevelt has this famous, Forgotten Man speech. But if you look at it, he was very clear, the forgotten man is the farmer. It's not some abstract forgotten man or kind of person, the farmer's forgotten, and we need to bring the farmer back up. And if look at it, he has a house divided speech. We can't do a half boom and half bust, kind of reechoing Lincoln's famous speech, half slave and have free.

Glock: But again, it's clear that he's talking about the boom and the bust is the industrial economy and the farms. So he expands all these farm economy supports and the price parity and the rest of it. But again, the economy is still fairly depressed. And as you mentioned, the famous things he set up such as the Agricultural Adjustment Administration and the National Recovery Act, and Recovery Administration did a lot of things to raise prices. But most economists agree now that probably squelched extra economic growth, because it was, when you had a problem that was created by deflation and you had sticky prices that didn't go down, the last thing you wanted to do was jump them all back up like this kind of balanced theory would seem to argue you should do at the time. But that's what they did.

Glock: And so when the economy wasn't fully reviving, FDR sort of said, "Well, we have the same problem Hoover did. We got to move over to the urban sector too, and how can we do that?" And they reshaped a lot of the institutions for that. The first thing they created is the Federal Housing Administration which is another step above the Federal Home Loan banks. And now people sometimes start squinting more when I tell them this part, if they haven't already been squinting or running out the room from the rest of it. But this is like, how many different federal housing programs are we layering on top of each other and how different are they?

Glock: So, the Federal Home Loan banks can give you liquidity for a hot second. If you need a mortgage, you've got a mortgage on your books, you’re Bailey Brothers and you just need a few bucks in the pocket. The Federal Housing Administration does more, it insures the mortgage against default. So this is not just a liquidity issue, this is a solvency issue. Any individual, Tom, Dick and Harry who makes a mortgage can now go to the Federal Housing Administration or the bank can, and they can get a government guaranteed insured mortgage. That if that defaults the government's going to pay off your mortgage at basically full value, and so they do that. And the other thing they do is change the Federal Reserve itself. So the Federal Reserve in 1935, there's the famous Federal Reserve amendments, at least famous to some, that make the Federal Reserve more centralized in Washington. And they make the Federal Reserve Board of Governors, really the directors of it, as opposed to these nominally private 12 member banks and all.

Glock: But people forget that one of the most important parts of that, and one of the parts of that act that were most advocated by Marriner Eccles, who becomes the chair of it was this new thing to expand normal bank investments in mortgages, and to allow the Federal Reserve itself to discount mortgages, to buy up mortgages. So now we're approaching something where the Federal Reserve itself is approaching this land bank idea. Marriner Eccles, who himself helped come up with the idea of the Federal Housing Administration and was one of the major pushers from it in the treasury and the year before, and as they show there's some good reason for this. He had he was still invested in numerous construction companies, and he also had some of his own banks and investment companies, the Eccles family investment companies that were in very bad shape as some of the bank examiners report said.

But people forget that one of the most important parts of that, and one of the parts of that act that were most advocated by Marriner Eccles, who becomes the chair of it was this new thing to expand normal bank investments in mortgages, and to allow the Federal Reserve itself to discount mortgages, to buy up mortgages. So now we're approaching something where the Federal Reserve itself is approaching this land bank idea.

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Glock: And if he hadn't gotten some of these things passed, they may have been in real trouble. But so Marriner Eccles really pushed all of this. And he was saying, "We have to get rid of the Real Bills Doctrine entirely." So if you look at 1935, this is just 22 years or so after the creation of the Federal Reserve, but the system was supposed to be created for all these short term real bills. And now you have a new head, a new law that says, "Hey, you can discount mortgages, you can buy up these debts. Commercial banks can invest in as many mortgages as they want. The Federal Reserve can support them." And you've reshaped this whole Federal Reserve system into this kind of already near image of it previous itself, where you try to support the mortgage debt.

Glock: And then, a few years later in the midst of the Roosevelt recession in 1937 you have the expansion again. Well, the banks don't have a lot of liquidity, there's not enough money going into deposits, we create this Fannie Mae that can buy them up and send off these mortgage backed bonds to create more investors and mortgages. And so now you've got layer on layer, the Federal Home Loan banks and the Federal Housing Administration and the Federal Reserve and the Fannie Mae, all of these things are supposed to be kind of undergirding this mortgage market. And as well as some other things such as the Federal Savings and Loan and Insurance Corporation, which is giving deposit insurance to these buildings and loans like the Bailey Brothers. And it's so they can act more like banks and can make more of these long-term mortgages that people won't pull them out in a run anymore.

Glock: So all of this is building up in all of this, and so we just have a lot, a lot of liabilities. I mentioned the majority of these new programs that governments created in this period are dealing with mortgages. And this is $6 trillion plus, or sorry, $6 billion plus, different era, that is supporting these. And a lot of these go bust sometimes decades later. So they didn't cost anything then and FDR, and Hoover and the rest didn't have to ask for any special money, but they all made very clear that, "Well, we know at some point or another, maybe the federal government's going to have to pay for some of these debts where we're guaranteeing."

Beckworth: Well, that's quite a history there, you've packed into the 1930s. A lot happened. I mean, fairly, all these new agencies and probably the legacies from that period with us today, right? All these government sponsored enterprises. So some questions that kind of flow out of that, so here's a question that I've heard discussed before and reading your book it's not quite clear with what I thought before was correct, but when would you say a national market for mortgages emerges?

Beckworth: So part of that, you mentioned It’s A Wonderful Life. Part of the story he says is, "Hey, Bob, your money's in George's house over there, and Sue your money's in John's." It creates this impression that the market for mortgages is still local. But all of these agencies, these GSEs that are emerging, they're effectively creating a national market for mortgages. So when would you say that there was such a thing as a national market? So someone in New York could invest in a mortgage backed security that had mortgages in other parts of the country

The Emergence of a National Market for Mortgages

Glock: Definitely during the 1930s and it becomes prominent definitely by the 1950s. So, as you mentioned, mortgages are an odd thing to make a national market about. Not only are they very individualized and very long-term, but they're based on very particular debts. It's not like we got a note on 20 bushels of grain and 20 bushels of grain are the same in Chicago as they are in Los Angeles. Mortgages are based on this little hunk of land that's totally distinct in Indianapolis, than it is New Orleans and all the rest of it. And so the distinctiveness and the strange aspects of mortgages, or one of the reasons the government feels it needs to step in, and by the 1930s, you see a lot of people saying, "Well, we need to create a mortgage market." This is a conscious decision.

Glock: I mean, a lot of this also has to do with what some of your listeners may know is sort of the original sin of American banking, which is the unit banking system. You have all of these very, very small banks that can, even the buildings and loans, only loan locally, or they're not allowed to expand to other cities, let alone other states. And all these systems much like the FDIC is meant to support these tiny banks that may have suffered bank runs and can't move money around in different areas. All these systems are trying to encourage all these little banks and B&Ls, and S&Ls to make all of these mortgage loans, because they can say, "Hey, look, I can make a mortgage loan which may be for a small S&L that can only have 10 or 12 on their balance sheet." I mean, these are significant investments for relatively tiny banks.

Glock: But I can make them because I can sell them off to the Federal Home Loan banks or Fannie Mae. And then somebody in New York, or Chicago, or San Francisco, can buy that mortgage back bond or can buy the Federal Housing Administration insured mortgage, because they know it doesn't matter where the mortgage was made. It doesn't matter if it was made in Indianapolis because the government is telling you it's as good as gold, it's insured. We're guaranteeing the value of it. So all of these things are specifically designed. So hey, all of these local banks can make the mortgages, they can encourage them, they can trade them back and forth without having to worry too much about kind of what's under the hood.

Glock: Sort of like the Gary Gordon's discussion of the 2008 panic and what happens when cash like instruments are no longer cash like, you actually have to have information about them. In this case, as long as the government is supporting them all, you don't need any information about them. You can just trade them back and forth. And that kind of leads to the explosion in mortgage debt that you especially see after World War II and bleeds to this kind of national mortgage market of trading them back and forth.

It doesn't matter if it was made in Indianapolis because the government is telling you it's as good as gold, it's insured. We're guaranteeing the value of it. So all of these things are specifically designed. So hey, all of these local banks can make the mortgages, they can encourage them, they can trade them back and forth without having to worry too much about kind of what's under the hood...In this case, as long as the government is supporting them all, you don't need any information about them. You can just trade them back and forth. And that kind of leads to the explosion in mortgage debt that you especially see after World War II and bleeds to this kind of national mortgage market of trading them back and forth.

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Beckworth: Yeah. So that raises another question. And that is, can a national mortgage market exists on its own? Because the mortgages, as you mentioned, are so idiosyncratic, they're so unique to each location. I mean, on one hand that would say no, other hand you might say, well, diversification, synthetic products, you could come up with something. But going back to this Urban Institute report that I cited some stats from one of the striking charts in there that I didn't mention is, you do see, maybe one of the few attempts to really grow private label, mortgage backed securities. And it gained some ground up through the mid two thousands, then boom, it's gone. And there's very, very little. It's a sliver of the market right now. It's mostly all GSE across, up and down.

Beckworth: So I'm wondering if in a different world, if there had been no government intervention, would we even have a national mortgage market? Or do you think our financial engineers are so smart, they still come up with some way to do it?

Glock: There's probably some way to do it. So as you mentioned there's two attempts that really happened. I only stated briefly in the book, but in the 1880s and early 1890s, there was a short-lived mortgage bond market, where they tried to diversify and some of these small groups tried to do it. And it went bust in the 1893 panic and wasn't really revived. And then as you said again, in the early 2000s, you had this very sudden explosion where private label mortgage-backed securities were the majority of the market, and then went back down to almost nothing. The answer without the government is probably not at least any sort of mortgage that Americans got used to.

Glock: So one of the problems with the private label mortgage market is the idiosyncrasy of it. You can diversify and you can make enough of it to make some different aspects and bets on different parts of the country. But when we have a 30 year fixed rate pre-payable mortgage, that's very difficult. Because now you have also where the financiers take all of that interest rate risk, that if it drops, you have to get early repayment of your mortgage. And that's something that, again, the federal government created, even in the 1916, the Federal Land banks, that pre-payable aspect of it. Because exactly farmers didn't want to get stuck with these higher interest rate mortgages like they did in the 1890s and not be able to pay them down.

Glock: So that was created with all of our subsequent things. You and I, or anyone else who has a mortgage, I guess I should mention that I still have yet to have a mortgage of my own, maybe one day after I write a few more books on it, will say that the interest rates have gone down consistently for 20 plus years, 30 plus years in the United States, and we can keep refinancing and repaying. And that's pretty tough to have a private sector will take that off or take the risk of another crisis. So other countries have some versions of this, the Danish covered bonds are often mentioned, and there's a where the banks support them to some extent, and you have diversified mortgages.

Glock: You can have something like that probably, but something based on the 30-year fixed interest rate, pre-payable mortgage, like we have in the US, there's a reason that's dominated by the federal government. And even those private label securities in the early 2000s. If you look at them, what was one of the reasons people were so invested in them, because they did also know, even though technically private, there were all of these other things that they could probably go to. They were relying on the VA, or FHA, or Fannie Mae or Freddie to buy them up if they were in a pinch or the rest of it. So yeah, without the federal government support, we definitely wouldn't have a mortgage market anything like we would now our banking system like we do now.

Without the federal government support, we definitely wouldn't have a mortgage market anything like we would now our banking system like we do now.

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Beckworth: Okay, we are getting near the end of our time, but I want to end on a question, kind of a big picture question. So if I step back and think about everything we've discussed, think about your book and maybe see it as part of the bigger trend. And I want to illustrate this idea, this trend, by referencing another development, another argument maybe that has been made over this period. And this is the argument for why the gold standard worked relatively well during the classical gold standard from like 1870s to 1914, and then it did so awful during the Interwar Period. So leading up to the Great Depression. So when you compare those two standards, very different outcomes, and lots of stories are given.

Beckworth: But I think one of the more compelling or convincing stories is given by Barry Eichengreen. And he said, "Look, the reason the classical gold standard worked relatively well was because people simply didn't have the voice they had by the Interwar Period, and for the gold standard to work well, it requires pain." If gold leaves the country, it requires a recession. In other words, a country has to be willing to sacrifice domestic stability to preserve the gold standard. International balance is maintained at the expense of domestic balance.

Beckworth: But by the time you get to the Interwar Period, that's not going to happen. Politicians are not going to allow that to happen. I think he uses the term enfranchisement people's voices are heard, politicians respond and I know some of the push back, well, it was the central banks who caused the problems in the 1930s, but why were the central banks so sensitive? Because of the politicization of the environment. And so I find that a very convincing argument, as democracy grows, politicians respond in kind. And I'm wondering, could you take that same idea and place it on top of the story you're telling in the book?

Applying the Link Between Populism and Politics

Glock: I think so. There is a similarity in this way. So whatever you think of the sort of general outlines of the balancing ideology bouncing through finance or the rest of it, it did at least sort of have parameters or bumper lanes, where we're supposed to operate. So say if the farm sector was doing better and you were supposed to then tamp it back down, or if the construction sector and housing was doing too good, relative to the economy, you'd you tamp that back down. But what you found is a lot of people who had supported this ideology, very fervently like Marriner Eccles, like Winfield Riefler in the 1930s were terrified when the 1940s and '50s happened that the mortgage market was booming. And they said, this is creating more inflation, we need to pare it back. We need to control these different levers, again, push them down.

Glock: But what they found is there was just no political appetite for that. This industry was huge now and had supporters in Congress, there was a housing block in Congress they said, and we can't now just turn the levers in a different direction now that we're happy where the previously depressed part of the economy was. And that's basically what you saw. There was this attempt in the 1950s for Winfield Riefler when he was back at the Federal Reserve to create what he called a bills only doctrine, which was the Federal Reserve, only buying up short-term bills. And that was kind of him trying to push back on what he saw as his work in the '30s. Which was, "No, no, no look long-term is doing great now, construction is great. We need to tamp that down again."

Glock: But what you saw is JFK actually ran against this. He mentioned this sort of stuff in his campaign and he said, "We're going to loosen up long-term loans again, we're going to get more money back into mortgages." And he won and he pushed that. And from them up until 2008, you saw a new appetite to do anything but keep throwing more and more money at the mortgage system. And when you saw a lot of the bailouts in the consequent, again, the Federal Savings and Loan Insurance Corporation. What I didn't mention before is the Federal Land banks that were bailed out in 1932 they got bailed out again in the 1980s with a few billion dollars in funds.

Glock: It was relatively minor next to the big S&L crisis, so people forget it. But people also forget that was the second time this industry would be bailed out. And I have no doubt somewhere down the road, we'll probably a third, or maybe fourth bailout of some of these. So yeah, that's the political aspects of this for something, the ideologues, who, some of them were self-interested, some weren't, but they seemed to take this seriously and they didn't realize that they weren't going to be able to kind of control the politics of this after it got away from them.

Beckworth: And that is interesting. Marriner Eccles wanting to put the genie back into the bottle after he pulled the lid and shoved it out. So he saw firsthand the price of democracy, once you taste that sweet housing market experience, it's hard to go back. Well with that, our time is up. Our guest today has been Judge Glock, his book, and you can check it out is titled, *The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913-1939*. Judge, thank you for coming back on the show.

Glock: Thank you so much again, David.

Photo by Win McNamee via Getty Images

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