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43 J. Corp. L. 899 (2017-2018)
Housing Finance Reform and the Shadow Money Supply

handle is hein.journals/jcorl43 and id is 951 raw text is: Housing Finance Reform and the Shadow Money Supply David Min* The election of Donald Trump alongside libertarian majorities in the House and Senate is likely tojumpstart housing finance reform efforts, and it appears almost certain that the federal government's role in housing finance will be significantly reduced. A number of legal and economic analyses have looked at the effects that housing finance reform may have on the availability of mortgage funding for American households. However, these commentaries have to date overlooked the implications that such reform presents for the global money supply. This Article shows that (1) housing finance has historically played an important role in money creation; (2) Fannie and Freddie today are a major producer of government-backed safe assets; and (3) these safe assets are at the heart of money creation in the shadow banking system today, which is an important part of the overall money supply. Accordingly, this Article argues that housing finance reform as it is currently being contemplated is likely to have negative near-term and long-term implications for financial stability and monetary policy. Policy makers should carefully consider these effects of major changes to the housing finance system on the money supply before committing to any course of action. I. INTRODUCTION .................................................................. 900 II. HOUSING FINANCE AND THE MONEY SUPPLY ................................ 903 A. Fannie, Freddie, and Shadow Money Supply .................. ..... 903 1. Defining Money............... .................... ..... 905 2. Shadow Money Creation ............................................. 906 3. Shadow Money and the Demand for Collateral ............ ....... 909 4. Safe Assets as Collateral ................................... 911 5. Fannie and Freddie Obligations as Collateral ............ ........ 912 B. Private-Label Mortgage Securities and the Money Supply.... .......... 914 C. Thrift Depository Institutions and the Money Supply ........ .......... 915 1. Thrift Deposits and the Money Supply .................. ........ 915 2. Thrift Institutions and Money Creation ................... ......... 917 III. HoME LOANS AS NATURAL COLLATERAL FOR MONEY................ ......... 918 A. Home Loans Are a Sizeable Asset Class .............................. 918 B. Mortgages Are Good Loans Overcollateralized by Valuable Assets ............... 919 C. Housing Finance and Monetary Transmission ....................... 921 D. High Costs and Long Duration ofHousing .................. ...... 921 IV. EFFECTS OF HOUSING FINANCE REFORM ...................................... 921 *Assistant Professor, UC Irvine School of Law. I want to thank Hilary Allen, John Crawford, Erik Gerding, Therese Maynard, Patricia McCoy, James Park, Frank Partnoy, Morgan Ricks, Jennifer Taub, Benjamin Van Rooij, and Joshua Wright for their very generous comments on various iterations of this Article. I also benefited tremendously from feedback received at workshops at Berkeley Law School, the National Business Law Scholars Conference held at the University of Chicago Law School, and the Southern California Business Law workshop held at UC Irvine School of Law.

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