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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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