Ep 57: Origins of the Mortgage Market (and Federal Bailouts) with Judge Glock

The modern mortgage: fixed-rate, low interest, 30-year term, 80% loan-to-value, amortizing. It wouldn’t exist without the backing of the federal government, but how and why was it created? And what were the consequences for the housing market and broader economy? Judge Glock joins us to share the surprising history of the modern home mortgage, the strange bedfellows who fought for its creation, and its relationship to a century of bank bailouts.

Show notes:

• Glock, J. E. (2021). The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913–1939. Columbia University Press.
• Gillman, H. (1993). The Constitution Besieged: The rise and demise of Lochner era police powers jurisprudence. Duke University Press.
• Seligman, L. G., & Cornwell, E. E. (1965). New Deal Mosaic: Roosevelt Confers with His National Emergency Council, 1933-1936.

Transcript

Shane Phillips  0:04  
Hello! This is the UCLA Housing Voice podcast, and I'm your host, Shane Phillips. This week, we're joined by Judge Glock to talk about his new book on the origins of the mortgage market, and the very close connection between mortgage policy and the federal bank bailouts that have dotted our history over the past 100 years. I don't think enough people appreciate the degree to which mortgages in the modern US are a product of government policy. If you went back to before World War One, you'd see very few mortgages with terms over five or 10 years, or for amounts over half the value of a property. And at that time, banks were legally prohibited from mortgage lending so the availability of mortgages was much, much more limited. The story of how we got from there to here starts in the early 1900s, with a surprising alliance between farmers and financiers. And Judge lays out that history for us in his book, and in this interview, connecting it to the mortgages, housing, market, and broader economy that we're familiar with today. Mike makes this point during our conversation, but for all the time that we devote to housing and land use policy, a lot of the decisions impacting housing affordability, and stability, and where we choose to live or can live are shaped by the financing options available to us. It's not that people don't appreciate its importance but financing is often treated as a subject for economists or finance experts when we'd all benefit from a better understanding of the consequences of its regulation, and misregulation. I found this episode particularly engaging because the players in this history all had valid perspectives. And you can easily dismiss them as purely self-interested or bad faith. But the answers to how we meet their needs without doing harm to other people, or other areas of the economy weren't and aren't at all clear. It's a discussion that I think really highlights what makes this kind of work so challenging and interesting so I hope you enjoy the conversation. The Housing Voice podcast is a production of the UCLA Lewis Center for Regional Policy Studies, with production support from Claudia Bustamante, Divine Mutoni, and Phoebe Brous. As always, you can email me with questions or show ideas at shanephillips@ucla.edu. For the next several episodes, I would especially encourage you to reach out because we're hoping to have a sort of mailbag ask-me-anything type episode within the next few months or so. We want questions of all types, whether that's research and policy stuff, like our thoughts on what the research literature and anecdotal evidence, say about specific policies or programs, or what areas of housing and land use research really need more attention, or stuff about the show, or UCLA, or our own work here at the Lewis Center. We don't have a date yet for when we'll do that episode but the more questions we get, the more options we have. Again, send those questions to shanephillips@ucla.edu. Okay, with all that said, let's get to our conversation with Judge Glock.

Judge Glock is a senior fellow and director of research at the Manhattan Institute, and he received his PhD in history from Rutgers University. He's joining us to talk about the origins of the US mortgage market as we know it today, as well as the federal bailouts of the finance industry that began during that time and become a regular feature of our economy. Judge, thanks so much for joining us and welcome to the Housing Voice podcast.

Judge Glock  3:36  
Thanks so much for having me on.

Shane Phillips  3:37  
And Mike Manville is my co-host today. Hey, Mike.

Michael Manville  3:40  
Hey guys, happy to be here.

Shane Phillips  3:42  
So first up Judge, what is a city you know, well, and where do you tell people to visit or like to show people when they visit? Take us on a tour.

Judge Glock  3:50  
I have a real soft spot in my heart for Philadelphia, and it gets a lot of flak and some of it justified. But if you haven't had a chance to really tour the city, you're missing out beyond of course the the gorgeous moments like Independence Hall, beyond the late 19th century Second Empire style City Hall, there's just amazing spots like Eastern State Penitentiary, which is this old Gothic style, late 19th-century penitentiary that held everyone from Al Capone to every bad seed in the city for a few decades. It's an amazing town that's underappreciated. When I lived there in the early 2000s, also, there were things... there was practically empty skyscrapers that you could wander through, it's probably a little less easy these days. But you could walk into a skyscraper with a bank vault that was just a jar and walk into the bank vault and kind of wander around in a 1970s-era bank vault office building without anyone giving you a hard time. All that to say is there's an immense amount there and I highly recommend it. I love to take people on tours the town.

Shane Phillips  4:57  
I've actually never been somehow but I feel like have been hearing for 15 years or something that Philadelphia is underrated. I'm amazed it still is. It seems like somehow it can't be location. It's got a pretty good location.

Judge Glock  5:11  
It's right in the center of everything, between the two big poles in America... 

Shane Phillips  5:15  
Exactly. 

Judge Glock  5:16  
... between DC, and New York, and it gets none of the attention and press. Maybe some of your listeners are, maybe they aren't familiar with the MOVE bombing? Have you ever heard of that? 

Shane Phillips  5:25  
Yeah, 

Judge Glock  5:26  
This is a city that literally bombed itself in the 1980s. It's the sort of thing, to fight this kind of radical, activist group, but horrible disaster. It's the sort of thing that if it happened in most other cities in America might be taught in every history book in the country. But Philadelphia in so many of these cases just flies under the radar. It's a shame.

Michael Manville  5:45  
I agree that it's a great city. I've always enjoyed visiting it, I have heard and I give some credence to the idea that it might be too close to Washington and New York, right? That it just, you know, if you're going to be in the Northeast Corridor, you're in New York or Washington, and so you don't go to Philadelphia. I mean, of course, over a million people live there. But I think there might be something to that, too.

Shane Phillips  6:06  
So this time, we're talking about a book, and that book is titled, The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts 1913 to 1939. It was published by Columbia University Press in 2021, and it is a very deeply researched book, I counted 1100 citations in the references section. And as Mike was saying to me a few days ago, it serves as a kind of pre-history or this is one way of looking at it anyway, as a pre-history to the better-known history of the Home Owners Loan Corporation and Federal Housing Administration, both of which were created in the early to mid-1930s so kind of near the end of the timeline of this book. Housing is in many ways the foundation of our economy today, for better or worse, and widely accessible mortgages were a major enabler of that so I think it's valuable to understand how we got here. And as I've said before, in the context of my work on alternative tenures, I think a lot of people take for granted how the mortgage products available to average Americans simply would not exist or would at least be very rare without this host of interventions and guarantees on the part of the federal government. The subtitle of the book, I think, is pretty self-explanatory, origins of the mortgage market and federal bailouts 1913 to 1939, but tell us about that title phrase, 'the dead pledge', where does that phrase come from, and what does it mean? This is kind of a bit of trivia I always found darkly funny in a way.

Judge Glock  7:37  
Yeah, so it's, it's the literal translation of mort-gage, mort meaning dead, and gage as a kind of pledge or bet. Around the 13th, 14th, 15th century, when the English landowners invented the mortgage or mortgage, that you were using law French at the time, which was kind of the language of the law courts, and that's where it came from. The idea of a mortgage was basically that since lending on land was illegal in some ways, a lot of the aristocratic barons of England did not like the idea that a money lender could capture land from the aristocracy. So they had a lot of restrictions on how you could use land as collateral. So a mortgage was basically a way to claim that the lender owned the land during the course of the loan. But during that time, the borrower just rented it. And then the mortgage, the lending died on the last day of that pledge. And then the borrower basically officially inhabited property for the first time, now they all knew it was kind of a legal fiction but it was a way to get around these early restrictions, both on usury and on the ability of landowners to use their land as collateral, and became an increasingly important part of English life in law and eventually the English financial system, especially in the 17th and 18th centuries.

Shane Phillips  9:00  
Yeah, and I was reading about the etymology a little bit, I actually, before reading your book, my understanding, which I think is just wrong, was the interpretation of death grip, because gage is also like hand or grip. I've always liked that as like a possible thing. There's also, you know, the word that is associated with mortgages, amortizing, we always hear about that as like the means by which the kind of structure, by which mortgages are paid off, which also has that 'mort' word in it, and that means like to deaden. And so it's like you're deadening the loan as you pay it off, which is also I don't know, it's just very interesting to me

Judge Glock  9:37  
To kill off the loan I've also heard, these are all reasonable. 

Shane Phillips  9:40  
Yeah

Michael Manville  9:40  
The more positive way that it's sometimes phrased is that you know, that you sort of pay it off over the life of the loan. That's the sunny side of it.

Shane Phillips  9:49  
I like deadening though, I think I prefer that. So since your book is focused on this period from 1913 to 1939, let's first set the stage as we enter that time period. What did mortgages look like in the late 1800s and early 1900s? What were their terms typically? Who was issuing them, and who was receiving them? What were they usually used to buy... those kinds of things.

Judge Glock  10:13  
So the most important fact about mortgages in this period is that they weren't given by banks, they were almost entirely given by individuals and the first mortgage census we have in 1890, the first time the federal government tried to get a feeling for how mortgages were being used in the United States, a large majority of these mortgage loans were coming from individuals, which usually meant neighbors in the local vicinity. Obviously, a mortgage presented obvious collateral for a loan, you could see it, you could look at it, it was a tangible thing, people couldn't run away from it. And they presented pretty high-interest rates for the people borrowing, most often farmers, precisely because there wasn't a lot of competition because all of the money for those mortgages was coming from the local community. Now, there were a few other groups that tried to lend on mortgages this time, some of these mutual savings banks, buildings in loans, which later became known as Savings and Loans institutions -  they were kind of cooperative organizations. But again, it was fairly localized. And that was a big problem. A lot of farmers were angry about this, it was actually illegal for banks to lend on mortgages, the national banks and most of the state banks. Because the idea was a bank is funded by the shortest of short-term loans, demand deposits, when you put your money in a bank, and you try to get it out again, you can take it out again any second. But if you're loaning on a hunk of land that's going to be there for eternity or you're loaning for years and years and years, that presents a problem. You can have a loan out on a mortgage, and the most common loan was around five years at the time but the money funding that is back can be taken out at a moment's notice. People are going to be rightly a little suspicious about how that can work out, if someone shows up the bank clerk's door says "hey, I want my deposit back", they'd say, "No, we loaned it to Bob the farmer., and he's got three more years to go on his mortgage loan". So they were short term, again, about five years, they were for very small percent of the total value of the land, usually about 50%, sometimes you'd have to get a higher interest second mortgage, they were all fairly high interest, and yeah they were very localized and outside the formal banking system.

Shane Phillips  12:25  
And just to be clear that prohibition on banks lending was really to prevent bank runs right? Were there other reasons behind that? Can you talk about that?

Judge Glock  12:35  
Yeah, there was some concern about banks being kind of landlords in and of themselves. And one of the research I've always wanted to get further in is that there wasn't a single exception that the banks could own, of course, their own real estate that they were built on. And so one of the reasons you see bank kind of skyscrapers dominated in the late 19th century, is that if they wanted to own real estate, they invested a lot in their own spot, and they built a lot of extra office space to keep it going up, and have place to lease out and so forth. But yeah, there was concern that they would kind of become new lords. And there was a lot in the 19th and early 20th century about American finance kind of eating up other sectors of the economy. It's the same reason that insurance was kind of in the early 20th century was cabined, and couldn't invest in or own a lot of independent corporations and so forth. But yes, the most important aspect of this, going back to Adam Smith, and Adam Smith, in the Wealth of Nations, has this kind of lovely passage about the failure of the Air Bank, which was actually partially owned by his benefactor. And he says, well, the reason it failed was because it was lending on land and land is just this illiquid security as we would later call it. It's hard to get out when people want their money. And so there was all these laws and regulations prevent the banks from lending on that to prevent that bank runs.

Shane Phillips  13:55  
Yeah. And I think your book makes clear that a lot of us think of the financialization or just this concern about the financial industry taking over the economy as being this recent thing as maybe starting in the 1980s or so. But it really goes back to at least the founding of this country, if not quite a bit earlier.

Judge Glock  14:14  
Yeah, absolutely. And you look at the earliest banks found in America by Alexander Hamilton, you look at the Bank of the United States, and you look at the Bank of North American, (and) these others, they made a conscious decision, "we want to restrict land lending in this, we're concerned about both the bank runs and how these banks become very powerful institutions in America". So yeah there was this long tradition of fear about how these banking institutions would work. But on the other side of that, there was also farmers who wanted a lot of loans and were very angry they couldn't get them. There was this huge banking industry growing up, and they said, "there's money sitting there and I desperately need a mortgage loan, but I can't get access to it". And so that kind of sets in motion some of the political processes I described in the book.

Shane Phillips  15:01  
Yeah, so you've anticipated where I was going. I wanted to ask what the interest or the motivation was for farmers here, what were they trying to get for mortgages, I kind of got the impression this wasn't really spelled out in the book. But I got the impression that it wasn't really for helping people to buy land to become farmers, but more as a way for farmers to get money out of their land, maybe to invest in things that would increase their productivity, whether that's, you know, industrial equipment, or horses or whatever was appropriate at the time. Maybe the analogy to urban housing today would be something like a person mortgaging their home to fund a startup business or something like that, as opposed to taking out a mortgage to buy their first home. Is that a fair characterization? Is that mostly what mortgages were wanted for at the time, at least among farmers?

Judge Glock  15:54  
Yeah, and that kind of continued throughout the period, I discussed that a lot of the reasons these farmers wanted because they were already farmers, you know, all the land was in a sense owned by somebody, and their argument wasn't that, "hey, we need this to be purchased, it's out there, and as being farmed, we need that loan, as opposed to these short-term loans we're getting right now". Like, hey, I need to build a barn, that barn is gonna pay down over five or six years, but all I can get from the bank, are these very short-term loans, when I have this, what they see is this beautiful collateral just sitting there. And yeah, so that's a lot of the impetus behind it. And partially I show in the book, that's also much of the emphasis part in the urban programs, and the Great Depression, which we often think is kind of encouraging homeownership, when you look at it, it has a lot more to do with investment, and getting this kind of access to collateral and paying down other debts. But we'll get to the urban side later, because as I point out in the book, a lot of these programs that we think of as being, as you mentioned, the Great Depression, and being very focused on homeownership and housing, really all started in farming. That's where most of these kind of ideas and programs began.

Shane Phillips  17:04  
Yeah, and I think on the one hand, there's a critical element to how farmers are looked at here. But to give them their due, it does seem like there's something to their critique. Federal law prohibited banks from lending out mortgages, and these shorter-term commercial loans were okay. And shorter term, I think we're talking about literally weeks or months, not even a short number of years. But compared to other industries, much more of the value of the agricultural sector is tied up in land. And there's a longer lag time between sowing and reaping of crops than the sort of beginning and completion of industrial goods production. So there is just this inherent disparity, you could say that everyone is treated equally, because they have access to the same credit options. But the circumstances of farmers make the available credit options pretty unhelpful. How do you think about the validity of their concerns and the need for some kind of reform to help out farmers, even if you don't agree with the approach that was ultimately taken by the government and advocates. 

Judge Glock  18:10  
They had a perfectly legitimate complaint, and yeah, I wanted to try to show that even though we had this weird system set up that involved kind of strange bedfellows of farmers with investors and financiers, and the government supporting a lot of this mortgage market as a way to overcome these burdens and issues they face, Mike it's like you mentioned, they had a lot of good collateral. And frankly, the strictures on mortgage loans were too strict. I tried to talk about... there were some versions of these were created earlier, and were kind of seen as failures where, "hey, the banks don't just have deposits, they have stock, someone buys stock in a bank, the stock is there for eternity, someone can't take, you can't go to the bank and say, hey, I want my money for the stock back". That could fund long-term loans or they could fund mortgages. And some people tried to do that before it was banned. I mean, but the biggest problem by far was the simplest is the original sin of American banking is as some of my former professors at Rutgers would call it was this unit banking system where banks weren't allowed to branch, you basically have one bank in one community, and they couldn't form a bank branch in the next community. So it means it was impossible for them to diversify. It was impossible for people in the West to get money from the East where most of the money was through this banking system, it was very difficult to do so. And with some amount of diversification, you can deal with that bank run issue. Say you don't want 100% of your asset, the banks' assets and mortgages, but if you have 10%, you know, you're not going to have 90% of the people deposit in the bank run at any point. You could do this, but there were so many ways that the American banking system instead of fixing this fundamental problem, which to a large extent they fixed in Canada where it ran pretty well and they didn't have a lot of these issues.... instead of fixing this fundamental problem of unit banking and individual nonbranching, banks they had all sorts of government supports came in to try to ameliorate the other problems... or the symptoms without getting to the cause of it.

Michael Manville  20:13  
One thing that struck me as I read the book and just to echo what you just said, is that in this instance, as in so many instances, the issue is not that the complaint wasn't legitimate. It's just that when you have kind of a newish problem, and a government sort of confronting it for the first time, you might come up with a very suboptimal solution to it, in part because it's just human nature. And we see this in urban policy all the time to say, "well, we're gonna make this problem, go away for the moment and kick the can down the road, and maybe it won't be as bad as the pessimists think it will". That's what we do. We do it in all areas of life, I probably do it in administering our academic department, right? I mean, it's just, it happens. But then it's only after the fact that you realize, "oh, my goodness, like there really was a better path here".

Judge Glock  21:02  
Yeah, and it took a... obviously, we have not totally gotten there. We've gotten rid of some of those issues with branch banking, especially in the 80s and the 90s, and we've created other ones. As I tried to show in the book, a lot of the kinds of government support and bailouts financial institutions that arose in the teens through the 30s obviously remain in our financial system today. But yeah, whenever you're trying to do a political reform yeah, it happens to everything, whether it's health care, housing, or finance, that the existing interest groups are really tough. And it's a lot easier to layer another problem on top of that, rather than get to those kind of root issues that are that are driving a lot of the issues. And that was clearly at with the farmers, the farmers, as I'm sure we'll get into, allied with the bankers and said, "hey, let's get the government to kind of support these loans, and then we don't have to worry about it".

Michael Manville  21:50  
Yeah, and I think the last point I'll just make about this is that as I continue in my own career, I've become more and more convinced that one of the most common, well-intentioned lies we all tell ourselves is that like, well, if something comes up down the road, we'll just change course right? And then we don't fully appreciate that the way policy just embeds itself in a larger infrastructure of interests and, and institutions. And it actually is, it's really hard to get off the path once you get on it. Not impossible, but hard.

Shane Phillips  22:18  
Path dependency was the word that was, you know, ringing in my head as Josh was talking.

Judge Glock  22:22  
Yeah, the fundamental issue is that new policy makes new politics, and people forget that when they're designing new policy, it's not just you create a policy, on top of the existing politics is those new institutions, of course, create new interest groups, create new factions, create new desires to expand them. And a lot of this history shows how kind of a little germ of an idea about how to help farmers kept expanding and expanding, and expanding until it kind of reformed our entire financial system.

Shane Phillips  22:51  
So a real focus throughout your book is the influence of this idea of a "balanced economy", which in the 1910s, was about preserving agriculture as a counterbalance to the growing urban and industrialized economy. Farmers, financiers, and quite a few others seem to have believed very strongly and sincerely that this balance was important for a resilient national economy. And that informed the reforms of the era we've romanticized farming and the rural life or the country throughout American history going back, at least to Thomas Jefferson. And you see this even today, when we do things like mandating a disproportionate share of federal investments in rural areas, despite in some cases, shrinking populations. But this effort to maintain the urban-rural balance back then was intentioned with a popular position at the time, which was to "demand equal rights to all and special favors to not". These special favors were referred to as class legislation at the time and class legislation faced widespread opposition in that era. Tell us more about the battle between opposition to class legislation and efforts to balance the economy and how balance ultimately won out in this fight.

Judge Glock  24:10  
Yeah, so my book tries to take ideology seriously. And I've gotten an occasional flak from that from people say, "it's just the interest groups". And obviously, I elaborate on the farmers and the bankers and the others who had a vested interest in these changes in these policies. But to use the other economists phrase, there's clearly revealed preference for ideology and taking it seriously because people talk about it a lot. They're not just wasting their breath, when they're elaborating and writing full books on these issues about the balanced economy or class legislation. People take this seriously. So the big kind of debate that I tried to elaborate in the book that created a lot of these policies, which was between, as you mentioned, the idea of class legislation and opposition to it, and the idea of a balanced economy. The class legislation, the idea is very simple as that the government has to ensure equal protection of laws of all groups. And this obviously made it into the 14th Amendment. But people took it much further to say this has to be equal protection of all economic groups. As I also mentioned, obviously, it was not often applied to race. Ironically, that's the main thing we think about it today, because the Democratic Party at the time, even though it was the party of white supremacy, was overwhelmingly focused on equal protection for economic groups. And they saw farmers as particularly burdened by two things, mainly the tariff, which they saw as not equal protection, because it burden farmers who had to export and had to pay for, for imported goods at the expense of manufacturers who got protection from the government. And the other main absence of equal protection was the banking system, which as I mentioned already prevented the free flow of dollars into farmers' pockets or vetted money from going from the East to the West, and was largely urban at the time. And so they were trying to reform in the late 19th century, early 20th century Democratic Party, they talked about this just constantly, I'd say, you know, it's on the top of their campaign booklets, they say the equal protection of laws is the fundamental idea of the Democratic Party; class legislation is seen as the inverse of that - you're legislating for one class or another. But some farmers, especially when it was revealed that the farming percentage of the population was shrinking, it became less than 50%, in the 1880s. And by 1920, the rural part of the country was smaller than the urban. And they were say, "hey, an economy to survive needs to be balanced between these different sections". We hear this, of course, with manufacturing, a lot of the time, you cannot have a service economy where you're just serving hamburgers to each other and writing code or something, you need the manufacturing, to balance out this other side of it. So they imputed that to agriculture. It says, "well, if this is just happening, because the nature of the economy, the government has to get involved in some way, you can't just have equal protection of the laws, the economy is going to drive people out of the farms and into the cities. And people were worried a lot about this. And I had a lot of quotes that people say our economy is going to collapse, we're gonna have starvation in the cities, if we don't have enough farmers, William Jennings Bryan, the three-time presidential candidate was obviously a big proponent of this. And so one of the ways these advocates of a balanced economy came up with to try to rebalance it was financial support from the government, you have the government step in and basically subsidize for mortgage loans. That was one of the kind of epicenters of this new balanced economy idea.

Shane Phillips  27:30  
And to be fair, I think at the time, they would not have characterized it as government support exactly right? Because they were not trying to spend federal money or at least not profit from it, is that fair? Or do you think even from the outset, they were saying like, we actually think some form of subsidization is appropriate here?

Judge Glock  27:48  
There were some who said that we need some subsidies. But you're right, most of the time, they characterized it as either we need kind of our turn at the trough to and they said, "hey, we're never going to get rid of tariffs, we're not going to get rid of this. So we need a kind of government support to balance what the urban centers get", which kind of says government subsidy. But the other side of this is, as I go into, one of the most important aspects of this is government financial support in the terms of guarantees of farmers loans, or bankers' loans to farmers, which many people said, "this is not anything formal, we won't have to call on this government guarantee for farm mortgages". It's just kind of a way to bolster up this sector that's not getting finance.

Shane Phillips  28:33  
And early on, it was not an explicit guarantee, it was not saying the government will definitely pay these debts if they are defaulted upon. But there was an implicit guarantee just in the way it was written. There was a kind of calculated ambiguity to sort of not commit the government, but at the same time, get the benefits of a government's commitment and backing to sort of build credibility and trust in the system so that people would buy these bonds, which would provide the money that would be lent then to farmers through mortgages, right.

Judge Glock  29:06  
Yeah, and so this kind of came about through two separate reforms in the Woodrow Wilson administration. Now, the first was the most famous the the creation of the Federal Reserve Banks. And obviously, the federal government was getting involved in the banking sector, and to a lot of believers of equal protection laws and class legislation, this was anathema. There used to be in the Democratic Party, they said we're for separation of bank and state, kind of analogize it to church and state, that this was, if we had to have equal protection laws, the one thing we had to make most sure was that the government was involved in banking because it was so dangerous, and so likely to create corruption in their vision, which perhaps they weren't wrong about that... 

Shane Phillips  29:49  
Not wrong 

Judge Glock  29:49  
... so in the in the Federal Reserve Act, for the first time the government created these semi-private banks and they are the Federal Reserve Banks; still today are semi-private but we don't think about them that way. But then they created this kind of federal structure, the Federal Reserve Board on the top of it, kind of manage it. And then they gave the Federal Reserve Banks an explicit guarantee, they said, dollar in the Federal Reserve is guaranteed by the government. And this kind of blew some people's minds that never before in kind of the federal government's history, had they given sort of complete an open-ended guarantee of what was purported to be a private sector institution like this. So when the farmers came along and started talking about, well, we kind of need a federal reserve for our mortgages. You have the system that even though it's not explicitly discriminatory against farmers, it's supporting this largely urban banking system. And the farmers, we need something equivalent, especially because we have so little access to mortgage lending,

Shane Phillips  30:50  
The farmers would say that this equal access but not really equal access was kind of speeding up the urban transition, right? Like that it was actually imbalancing things and it was hastening this decline in agriculture.

Judge Glock  31:05  
Yeah, and they, you know, had, again, some point to that; there was some justification. Equal protection law, something I care a lot about, actually, you know, some critics of that in, say the economic sphere could rightfully use the William Blake quote, that one law for the lion and the ox is oppression, a law that says you are allowed to eat whoever you want, that's going to benefit a lion, and not so much the ox. And you know, the farmers, hey, the law looks non-discriminatory, but it says, "Hey, the Federal Reserve Banks are only giving very short term loans bound 90 days, the farmers got a little benefit that an agricultural loans can be a little longer up to six months. And that was they were very happy about that. So it was the first kind of creeping in to this balanced ideology, anti-class legislation in there. But they said, we really, in the whole, this system is biased against us. So that resulted in the creation of the Federal Land Banks, which is not the discovery of my book, but kind of one of the main arguments I'm trying to make in the book is about the importance of these federal land banks were which were proto Fannie Mae, Freddie Mac, of sorts that were, as you already mentioned, Shane, wink wink implicitly guaranteed by the federal government that turned mortgages, in this case, farm mortgages into mortgage-backed bonds, sold them out to the rest of the country, and so a lot of the problems that we later saw with Fannie Mae and Freddie Mac. 

Michael Manville  32:27  
Yeah, I think, you know, going back to just sort of the perspective of the people on the ground at that time, you can imagine if you talked yourself into the idea that the prohibition or the reluctance to lend to farmers was irrational, right, that the market had an irrational aversion to lending on land, that you could also imagine an insurance system for that that would really be harmless because it would never be used, right? That like, you're just like, hey, you know, what we have here is a market failure. Members of the private market are irrationally fearful of these investments that are actually quite safe. And so if you just say the government is going to implicitly or explicitly guarantee that you've resolved that failure, you've aligned everyone's incentives, and you're backstopping it, but it's like, it's the ultimate deterrent, it'll never be used. And that's the kind of thing again, that like you can talk yourself into...

Judge Glock  33:19  
Oh totally! 

Michael Manville  33:19  
And I think, oh, yeah, yeah....

Judge Glock  33:19  
And yeah, the argument was, hey, this is going to be the most secure bond on Earth. You're going to have, the way it was set up was very complicated, no need to go into the details on it, but basically, you're gonna have a bunch of farmers that are themselves going to guarantee these mortgage loans, These are going to go to these banks that themselves are gonna guarantee, add their guarantee on it, and there's going to be the actual land collateralizing them backing them to, so we won't need this implicit government guarantee in a million years, don't worry about it, it's just a way to get this weird market going that people haven't been used to because there was nothing like it before, and create this new market for mortgage backed bonds, and... 

One year later !

Yeah, exactly

Shane Phillips  34:04  
I want to come to what happened. But before we get there, I do want to take a step back and just talk about equal protection and the sort of philosophical side of this a little bit, because I do think it certainly applies to housing and many other fields as well. You write about how a government ideology of equal protection evolved over time and during this time, into an effort to promote equal opportunity or equal outcomes. And that's I think, really what we're talking about in the case the farmers were making was that equal protection was not enough. And I think you view that evolution negatively or at least critically. To me, it sounds pretty positive. I do see the downsides here of course, but it's really a recognition that it is often not enough to give everyone the same tools, and assume that affords them the equal potential to achieve a good or successful life or whatever we consider you know, desirable as an outcome. I'm not sure we would have housing vouchers, public schools or lots of other broadly supported programs like that if equal protection was our sole concern and opportunity and outcomes weren't of interest to governments. And I think you also see this in the two major components of the Fair Housing Act where the non-discrimination provisions really represent the equal protections side, but the provisions to affirmatively further fair housing, which is to proactively undo the legacy of earlier discriminatory and segregationist policies, that represents the effort to equalize outcomes or opportunity. What are your thoughts on that, especially as it relates to housing and mortgages and the finance tied up in all of that?

Judge Glock  35:43  
Yeah, it's a good point. I think, obviously, as you pointed out in the book, I'm fairly critical of this evolution, especially as it applied to farmers and homebuilding and mortgages. The important thing, which I do try to give some of the critics of the early 20th century, equal protection consensus, their due is that as we already discussed, they were right about some of these things. And fundamentally, these abstract ideas we have about equal protection or about equal opportunity, always get much trickier when you get down to concrete examples. So, you know, and the Supreme Court has wrestled with this for well over a century, at this point now and in, I believe, Howard Gilman's fantastic, about constitution besieged, you see how this kind of extreme vision of equal protection where they were striking down a lot of laws, but said, you can't benefit this group over that group really became difficult when they realized, "hey, you know, almost every government act in some shape or form is going to benefit one group or another". So I think there is certainly kind of room for playing the joints for both of these ideas. And even though I like the idea of equal protection, I also like the idea of equal opportunity and trying to ensure that as well. I think, where it came kind of a cropper here, and where the idea is fundamentally misguided is this idea of economic sectors, we're not even talking about low income versus high income. We're talking about this idea that, hey, different sectors of the economy, like, "Hey, I'm farming, I'm less being left behind, or I'm manufacturing and I'm being left behind". The government's job is to make sure all those groups have equal outcomes. And that to my mind just creates all these infinitudes of bad log-rolling policies and sectoral subsidies that aren't benefiting the least well off, but are benefiting large economic interest groups that then become really hard to dislodge later.

Shane Phillips  37:32  
Right, I think you probably see, I think you do see in a lot of cases where you have that kind of thing, you might have this legislation that benefits farmers. But then is it the smaller farmers, the poorer farmers who are really getting most of the benefit from that? Probably not. I think that's not the story of farming in the US over the last 100 years, 50 years, whatever amount of time as they've consolidated, it's the very rich aggregations and these conglomerations that are really reaping a lot of the benefits of all these farm subsidies and so forth.

Judge Glock  38:01  
Yeah, the farm subsidies is, of course, is the quintessential example of that bad process playing out. And I tried to point out that a lot of the farm subsidies were originally financially based and based around these kind of different lending programs, as opposed to what we think of kind of the straight cash payments. And that one of the most important beneficiaries of these program changes were financiers, bankers, etc, who liked these new they were tax free, which was a fairly new thing on the scene at the time, tax-free mortgage-backed bonds, who liked the high-interest rates, who liked the implicit government guarantee. And then like so many of these cases, even though there was a lot of rhetoric about helping the small farmer and so forth, as I tried to show up, there was also a lot of more sub-Rosa rhetoric about helping financiers who didn't have good investments, who wanted to get involved in the market. And very quickly as these institutions were set up, they lead to pretty explicit support for banks and financiers

Shane Phillips  38:59  
That tax exempt status really struck me when I read it too, because you noted during that time, for one, I think there were not a whole lot of tax-exempt investments available to anyone. But more importantly, the tax rate, the highest marginal tax rate for the highest earners was around 70% I think you wrote at the time, and this is kind of coming out of World War One where taxes have been increased really dramatically, and it would be increased even further for World War Two. But the ability to evade taxation when the highest marginal tax rate was 70% was just of an incredible value. And so you can really see the motivation for the very wealthy and the bankers and so forth in that regard as well and how central the tax exemption was to it for them.

Judge Glock  39:43  
Yeah, they were very explicit about this. This is a great investment and the government has given you a big extra boost by not taxing it. So much so that in the 1920s, there was actually a proposal for a constitutional amendment to ban all tax-exempt bonds including municipal bonds, state and local bonds, because according to some of the Supreme Court rulings at the time, they would need that. And it just barely failed. And I think one of the underappreciated answers that the reason it failed by just a few votes is because of these federal land bank bonds. That supporters said, "well, if you're not going to support the farmers, and the banks that need this investment, well, then forget you, you're going to ruin this whole market". And that handful of votes was partially given by these people trying to protect this great investment opportunity. And obviously, the consequences of that have reverberated on down to today.

Michael Manville  39:44  
I want to just reiterate something, a point Judge made earlier, in this that I think is important, which is that you know that I think the balance between equal protection versus trying to affirmatively advance opportunity is always tricky, but I think it becomes the order of complexity goes up from like, the individual level, to the group level to then just like a big occupational level, right? Like the courts, these days, equal protection is most often discussed in the courts, and the courts, I think, have the easiest time with it, when they look at particular individual or individual rights that have been compromised in some way that seems to violate equal protection, it gets more complicated when you blow it out to a whole group, regardless of what that group is, for reasons Shane mentioned about group heterogeneity. And then, you know, when you get to something that's a farmer or the farm sector, I think it just becomes very hard. And in part, the history of the US shows this in that like, one of the opportunities Many people involved in farming have wanted was the opportunity to not be a farmer, right, that there's a lot of reasons farming declined in the US, but that people left for the cities because farming is really hard work, and then they found more opportunity elsewhere. And one of the things you do, sort of this is an argument that comes up in urban policy a lot when it's like, "oh, we want to deliver aid to a declining city", is that on the margin, right you implicitly say like, "if you want help from the government, you should stay where you are". And that works really well if everyone in that place, or that group just wants to stay where they are. But one very important aspect of opportunity is mobility. And so when you say you're plowing this money into a sector, what you're basically saying is, well, everybody in the sector right now, that's where they want to be. And that's just not always the case, and so that's why I think that becomes kind of foggy. And I think it's one reason why the idea of balance in the economy, it never goes away. It has this... we intuitively like the idea of balance. But at the same time, it just becomes very difficult to actually carry out in a way that people look at when they look at it closely and say, oh, yeah, that's working.

Judge Glock  42:37  
Yeah, no, I think that's exactly right. And it just fundamentally misunderstands that the goal would be to help people, not sectors or types of businesses, and it's making this strange judgment that, hey, we know what percentage of agriculture should be in the economy, it should be 43.2%, or whatever, you know, which is kind of like a patently absurd thing. Especially as we know how rapidly these things change over years and decades and generations. If you were told anybody that 2% or less of the population would be farming today, they would have said, well, the country would have starved to death. But that was just largely an effort, we have a very productive farm sector, and they were kind of screaming against the wind on this and refusing to admit that, "hey, that's not gonna help a lot of these people", and like you said, we're gonna get a great boost off by moving into the cities and finding new jobs,

Michael Manville  43:27  
Yeah, and it's again, this sort of idea that these narratives often and understandably, so it's not an intuitive idea, they don't account for productivity, right? That we didn't lose farms, per se, right or farming, we lost farm employment. And for very understandable reasons, if you're especially an elected official, right, they're like jobs, like, that's what you focus on. But yeah, and the same thing has played out with manufacturing where it says productive and profitable as ever, it's just that very few people work in it. 

Judge Glock  43:56  
Yeah, you can do so many of these same claims, eventually, and I have no doubt in 20 years, we're going to be hearing something about, "Well, God, can you imagine a farm community without X numbers of coders or whatever it is", people are saying that you can't or, you know, our economy is going to collapse if you don't have this exact amount of people in whatever it is at the time. And that's just a kind of mistaken idea.

Shane Phillips  44:20  
I have a lot of empathy for the people of the time, in particular, because we're having these debates now about, you know, losing jobs to tech and so forth. And going back, not that long, technological progress was quite slow. And so they might not have really experienced many other examples of like, okay, yeah, a lot of jobs are going to be lost in this industry, but it's going to be made up for elsewhere. Like we've really learned that, and it's not to say that we don't have to care about the people who lose their jobs in the interim, and like, what happens to them and how they're going to fare in the next field. But we just had so many examples of this creative destruction process, not leading to lower employment naturally, just leading to more productive economies overall. But you can imagine 100 years ago, they wouldn't have had a whole lot of examples to look at in living memory at least.

Judge Glock  45:10  
Oh, yeah, I mean, exactly. This was an unprecedented seen change in humanity, perhaps unparalleled, in the history of the world, where you had most economies in most places based off farming, basically, since the Neolithic Revolution. You were talking 1000s and 1000s of years before and all of a sudden, you say, "no, no, no, this is going to be a much smaller percentage of the economy", that looks strange to people. I get like (what) you say, I'm very understanding of how scary and strange that looked at the time.

Michael Manville  45:38  
And I think just to put a cap on this, what Shane said, just circles back again, to this crucial difference from a policy lens of extending help to individuals. And rather than saying, like, well, the broader shape of the economy has to stay the exact same. You know, if someone is losing their job as a farmer or losing their job in a manufacturing plant, essentially, through no fault of their own, you know, because technology has overtaken it, you know, certainly they need help, and we should try and cushion their landing. But that's very different from saying like, "well, no, the factory can't close, or the farm has to stay there and it can't be redeveloped into something else".

Shane Phillips  46:14  
It's saying, let's not keep the coal industry running and at full employment as long as we can. But let's actually help people as they fall out as mines close, to find something else to do with their lives and earn a good living and so forth. I think most of our listeners will not be big fans of coal. So that might be a good example.

Michael Manville  46:36  
Fair enough, tobacco farms.

Shane Phillips  46:39  
So let's get back to the land bakes really quick. We'll talk a little bit more about the farmers and then I do want to transition to talking about urban mortgages a bit. I foreshadowed a little bit that very shortly after the land banks were created, they required a bailout. I think this is the first bailout in American history, or is that right? Tell us about that process and how we got there.

Judge Glock  47:01  
So yeah, there's some different arguments about sort of our when is the first federal bailout, I claim that by some reasonable measures, the Federal AmEx, do receive the first bailouts in American history. Now, one could be during the World War One itself where the government, these land banks, they can't sell their bonds anymore, the farmers are just getting started on all of this, they opened literally just months before or are in the midst of US getting involved in World War One. And now nothing can happen. And so the government says, "Okay, well, we'll buy the box, we'll support them, we'll throw in some money, we'll buy some stock in these land banks, and help bolster them, so forth". So it didn't take long again, very surprised now, you know, we won't need any of these guarantees in a million years and months or barely a year later, they're saying, "hey,  we gotta, we gotta buy them up". And the government gets very explicitly involved in that. And then they kind of use their increased involvement in these banks, which again, are supposed to be semi-private, to start bolstering the rest of the financial sector. And in World War One in general, they start creating a lot of groups like the War Finance Corporation that are similar models of semi private semi-public, largely designed to help the financial industry, whether it kind of the chaos of the First World War, which had been inundated with the the issue of Liberty Bonds, which was eating up all of people's savings, and was just seriously discomfited because of the upheavals at the time. And then throughout the 20s, these banks just continue to grow with increased government support. And they were used pretty consciously, both by the financiers in them and by the government itself, to support a lot of rural banks that were very troubled throughout the 1920s.

Shane Phillips  48:49  
And, you know, I think these federal land banks and their problems get to the heart of your message in the book, which I interpreted as, however you feel about the government helping farmers access money to invest in their farms or receiving other kinds of support. It was a mistake to do so by getting the government deeply involved in the financial sector and prioritizing the safety of mortgage bond investments that were mostly invested in by rich people. So why did we go down that path? And assuming that we were likely to do something or should have done something? Do you have a sense for what other options we might have had other paths we might have gone down?

Judge Glock  49:28  
Yeah, I think you already saw some of these sort of bought version in the previous era. Some of these buildings and loans that I mentioned, they were kind of cooperative groups, largely of farmers also in the urban sector of workers who were trying to help each other use each other's kind of credit to back these mortgage loans, which they knew were long term and to keep their own investments in their fundamentally, they just should have reshaped that banking system to allow these banks to branch and to allow them to invest some portion of their their funds in mortgages that would have created that sort of need. gotten rid of those previous problems that have given rise, the lack of mortgage finance, what I was trying to get out of a lot in the books that even if you can understand that there's some need to support this sector or the people in it, as we've already discussed, the kind of worst way to do that is implicit guarantees of finance, because the politicians love them for all the obvious reasons it doesn't go on the budget, right that year, you don't have to vote on a new tax, payments come due years, maybe decades later, after you're out of office, and it helps these diverse group of interest groups, not just the farmers, you can get all these financiers on board, like you mentioned, love this new bond investment, especially when taxes are so high.

Shane Phillips  50:42  
And I think you can convince yourself that it won't cost anything that this guarantee will ultimately pay off like, you know, you need that government guarantee to kickstart the market perhaps to lend trust into the system or build trust into the system. But at the end of the day, these are safe investments. And you know, the government's never going to have to step in and bail anyone out. Of course, that's not what we've seen in practice but you can easily imagine someone convincing themselves that that is the case.

Judge Glock  51:13  
And they sincerely convinced themselves of that time and time again, most definitely first with these federal land banks, but then, in subsequent groups everything from the Savings and Loan Insurance Corporation to the Fannie Mae, and so forth. And exactly every time they'd seem to earnestly believe this is not going to cost us a dime. And they say, so in private correspondence, not just in public. But in public, and in reality, giving that implicit guarantee creates all those problems of what your listeners know, as moral hazard that if somebody else is going to pick up the tab, you're going to be a lot riskier, knowing that you don't have to take the downside. And that's a very dangerous thing to encourage.

Michael Manville  51:52  
And I think that's... it's a nuanced point but it's an important one, which is that even in a situation where you correctly observe that there's irrational risk aversion, and that it could be corrected with a government guarantee, that guarantee can now create irrational....

Shane Phillips  52:09  
It's like swinging the pendulum all the way the other (side)...

Michael Manville  52:10  
 Right, it's a very difficult balance, right? So even if your diagnosis is correct, your treatment might just create the opposite problem, and it's a tough problem. 

Judge Glock  52:20  
Absolutely.

Shane Phillips  52:21  
I mean, I do want to push back on the idea that these Savings and Loans or buildings and loans or cooperatives could have been sufficient, because I think about just how much money is circulating. And the challenge with a mortgage is you lend out that money, and it takes decades to get paid back. And if there's not someone to buy it from them to liquidate it, basically, so that they have the money to lend out again, and don't have to wait decades. Is everyone who wants to buy a home actually going to have access to that credit? Or is it going to be in short enough supply that the interest rates are going to be very high? Like, is it really realistic? You know, at least if we do want to achieve things like mass homeownership, which we could certainly debate in a different podcast, if that's our goal, is that achievable just by using the money that's circulating in the kind of regular real or whatever economy? It seems like no one has the liquidity of the federal government, because only the federal government can print money, it can operate with deficits, and all these things like, can these other entities really get us there or is it just a partial solution?

Judge Glock  53:28  
They can get you a lot closer to that. And I'm sure some of your listeners know about, let's say Danish covered bonds and different countries, different attempts to solve this very difficult problem, which is squaring the circle of the desire to find investors for these weird long-term assets, like mortgages.

Shane Phillips  53:45  
Are there other countries who do this very differently than we do?

Judge Glock  53:49  
Yes, and I won't go into all the details of this. But you find places like, like Canada, again, that did a pretty good job of this and didn't really have anything like our federal support for mortgages, really I believe until the 1960s, and yet attained a fairly high homeownership and farm ownership rates. So there are ways to do this without getting the government finance involved. So there are investors who want these kinds of long-term assets, and you got to connect them with those farmers and homeowners who want to borrow for long term.

Shane Phillips  54:25  
These are like the insurance companies, pension funds, that kind of thing.

Judge Glock  54:29  
Yeah, a lot of those. And historically, as I point out, insurance companies were one of the big in funders of far mortgages in the 19th century, and they got after the 1893 panic, they kind of pulled back from that, which was unfortunate, and they were partially pushed out of that as well, by some new regulations. So yeah, not just the savings and loans as a long term solution, but the expansion of the banking system, the creation of these covered bonds, that allow the banks to guarantee them, take them off their books, sell them into a wider market. You need the banks that actually are able to do that. At a bunch of those different institutions can create a fairly functional mortgage market, but not one like we have now, where you have the 30 year mortgage, which is I point out in the book, these federal land banks were kind of creating the first very long-term mortgages up to 40 years with a prepayment possibility, which these two combinations that are kind of distinctively American or almost completely distinctive to America, are very, very long term with fixed rates that people can prepay. And that was allowed in the original federal land banks as it was with the subsequent urban mortgage policies. And that asset wouldn't exist without the federal government, you can get a homeownership without a 30 year fixed rate mortgages with a prepayment possibility but that's the route we've gotten because the federal government got involved in it.

Shane Phillips  55:49  
That's a good transition, talking about urban mortgages, let's jump ahead about 10 years. So the land banks were created in 1916, they were bailed out, at least, you know,  as you're seeing it, a year later, they have various problems in that intervening decade. But we'll kind of skip over that, and move to the Great Depression, really. And at the time, Herbert Hoover is the President, 1933 FDR becomes the president, both of them started out their terms really focused on this urban-rural balance issue. And again, really seeming to believe that it was an important problem to be solved, and not just a way of benefiting financiers, and in making it kind of palatable. Over time, though, you argue that both of them shift their focus and see the imbalance not as between urban and rural, but between sort of construction and everything else are these long term, fixed capital, infrastructure, housing, those kinds of investments in everything else, which sharply fell off starting with the Great Depression. And so tell us about how that mindset shift occurred. And then how it led to the creation of, you know, the Homeowners Loan Corporation, not so much related to this, but more so the Federal Housing Administration as a means of loaning to new housing construction, and how that got us the 30-year mortgage and all the things that came with that? I know, that's a very big question, but like, walk us through some of that history.

Judge Glock  57:21  
Yeah. So when Herbert Hoover came into office, I reported on a lot of both of his internal and external reports that he was looking at the time and the amount of focus he spent, as he, as you mentioned, kind of totally honestly and forthrightly, not as a cover for kind of nefarious secondary interest that this urban rural balance was going to upset the whole economy is pretty astounding, in retrospect. And he's even said there was a report, he got kind of an economic transition team that said, this urban-rural balance is likely to upset the whole economy, we're going to see a big crash, and as the Herbert Hoover Library, you can see he himself looks like he acts that out. So you know, this is a serious problem but we don't want to say there's a big crash coming. He spends more than the first year of his administration trying to get new financed mortgages through these kinds of federal marketing boards to help to buy and hold short-term crops, and eventually try to expand the federal land banks in the midst of the burgeoning Great Depression. Now, the Federal Land banks truly and utterly claps and truly and indisputably received a bailout in 1932, I believe is $125 million bailout. So substantial, this is about as clear as day an example of bailout as you can get, and perhaps argue, this is the first big clear open one in American history. They said at the time, hey, this is just temporary, who's gonna die, it's gonna boil over and internally in the documents to say, "we're never gonna get this money back". So that was a little uncertain, or at least not made clear to the American public. But the surprising to me and which made me start the book, so you have this huge bailout of this failed system, and then immediately, you have the rest of the government says, "well, let's do the exact same thing for urban mortgages", which just seems like such an absurd idea. So just six months after the bailout of these federal land banks, the government created the Federal Home Loan Banks, almost perfectly mimicked off this that they they borrow largely from Buildings and Loans or Savings and Loans, they issue mortgage-backed bonds or collective bonds. There's 12 ifdferent Federal Home Loan Banks, like there were 12 different federal land banks throughout the country, which itself is both modeled on the Federal Reserve Banks, and they create this new institution, precisely because you said you look at the different sectors in the economy and the heavy industry, things like lumber, furniture, wind and all these things that went into house building and most importantly, house building itself fell off a cliff- house building by some measures dropped by about 90% in the few years of depression and so nothing else kind of came or few other things came close to this - consumption. and farming etcetera didn't drop with such an extreme level. So these Federal Home Loan Bank says, "hey, we have this problem". And if you keep the economy balance now between kind of heavy industry and construction and light industry, kind of service jobs, we need to bolster heavy industry and the nature of heavy industry is it requires long-term investment. So all the same arguments we talked about earlier about farmers not getting access to long-term investment them needing long-term loans off the solid assets that they can collateralize at banks, this plays out just pitch perfectly again, on the urban sector, and they create the Federal Home Loan Banks under Herbert Hoover, Hoover really tries to reshape its Federal Reserve and say, "Hey, focus entirely on getting these two sectors, the economy balanced back together again. I quote John Maynard Keynes, who was very obsessed with this idea as well, that the sectors were in ,you need to particular lending to these long term agencies to get the economy moving again. And then FDR, who also as as you mentioned, his first kind of year in office, or first few months is overwhelmingly focused on farms to an extent that we don't fully appreciate and says, "this is the basis of our economic trouble". It's still a farming thing, kind of what Herbert Hoover was thinking a few years earlier. And as I mentioned before, in his acceptance speech at the Democratic National Convention, he talks about things like amortization periods and interest rates on mortgages, which is definitely a first and last he was obsessed with the idea of mortgages. But you know, if you have a presidential acceptance, nomination acceptance speech, saying, "how to get amortization rates to speed up, you know", just kind of wild stuff. And he spent a lot of time expanding the federal land banks, giving them more money, more bailouts. But then, in 1934, shifted to some of the warnings actually, of John Maynard Keynes, himself and others to say, what we really need is this increased lending for housing particular which is going to get this heavy industry started again, and the Federal Housing Administration was largely the creation of that. And one thing I do try to show is that the interest behind it, even though it was kind of portrayed as a group that was mainly about homeownership. If you look at it, it was overwhelmingly heavy industry, the construction industry and banking industries, which won more mortgage loans on their books and more support for this, which they hadn't gotten before.

Shane Phillips  1:02:17  
And can you just say what the mortgages look like at this time? Were they essentially what we're familiar with today, you know, 30 years 20%, downpayment, amortizing fixed rate, all those things?

Judge Glock  1:02:30  
Largely, I think the original FHA loans were 20 years and I want to say the FHA moved up to the 30 year mortgage in the... I want to say in the 1940s, later 1940s, but it took a while but a very similar beside the exact timeframe. Yes, amortizing as I mentioned, FDR cared very much about amortization. They were the prepayment, fixed rates, all of those things that we've come to become familiar with, which were almost unknown in the urban lending sphere, some of these savings and loans and buildings loans had 20 year loans, and usually weren't always fixed rates, and they sometimes have limits on what you could do with them. But the extent and size of this was kind of unknown, until the FHA came along and created most of what we know as a modern urban mortgage in combination with both, as you mentioned, the homeowners Loan Corporation, and the Federal Home Loan, banks, all of which were, very explicitly, we're about bailing out banks. The homeowners Loan Corporation, we think, hey, they're lending money to take mortgages, off banks, and books, we're going to pay off mortgages for you, the borrower, but they said very clearly the person who wrote it was a member of the building and loan association who said, this is going to be great. We have all these mortgages that aren't paying off in our books. The government is now going to eat them, and they'll absorb the costs. So yeah, the bank were pretty clear, and they helped create this long term mortgage that we think of today.

Shane Phillips  1:03:57  
And I found it interesting that the initial proposal by the FHA or as a part of creating the FHA was only to loan mortgages for new housing. So it really was for construction, it was to boost that. But I think even before the rules were approved, it was expanded to just include all housing purchases, basically. So if you just wanted to buy a 50 year old home, you were eligible for the same or very similar mortgage products. And so it very quickly lost that focus on construction and just became kind of a housing finance thing generally for everyone.

Judge Glock  1:04:31  
Exactly. And so yeah, the first proposal as it came out was very focused on this heavy industry, in which case you really kind of only care about new housing. But some of the the interest groups threw a fit and there's this wonderful book you can actually get, I think, on Amazon, New Deal mosaic, I believe it's called, that has kind of the most complete transcripts will ever have the new deal where transcripts word for word about FDR and his top economic advisors, talking about how to revive the economy and the Federal housing, the FHA and the National Housing Act, they were created this time where the overwhelming focus, and you can see them very clearly is, hey, if we don't do existing mortgages, we're gonna catch hell from the BNL groups and the other groups. And while this might piss off the insurance industry, but we can get them paid off in another way, and so they were very clear about how the interest groups were having a say in this and yes, helped expand that to the existing mortgages as well, existing housing as well.

Michael Manville  1:05:28  
I mean, I think it's so interesting to me, the you make these compromises, that's just part of politics to get your bill through your program through, but that the program was so focused on the important role of construction played in the economy at that time. And it's created this whole ecosystem we now live in. And of course, it's such a different world. It's understandable that in the 1930s, you would look at if you were a budding Keynesian, right, and Keynesian was brand new and say, like, well, what, where's our multiplier? It's like well yeah, construction. I mean, there was no social safety net right? Right now, a Keynesian says, like, you know, where's the multiplier, it's food stamps, right? That's the money that just gets spent immediately. You didn't have a lot of women in the workforce, you had a very small service sector, you had a tiny sector of people doing other things. If you were looking for a broad based sector with a high marginal propensity to consume, it was going to be homebuilding. And so you created this kind of juggernaut. But today, of course, as you and Shane just pointed out like most of this program has nothing to do with construction, the US stopped building homes. And it just shores up the ownership of a home asset. And oftentimes for people who are quite affluent and have a very low marginal propensity to consume.

Judge Glock  1:06:44  
Yeah, and, and I do try to point out in the book, how central homebuilding was to Keynes himself, and a lot of the new economist sometimes attach to the institutionalist School of Economics, but themselves were closer to Keynes than we often think, that really saw this as the driver of the economy. Which is true if you look at recessions and booms, what changes is not some of these basic consumer goods, not surprisingly, these heavy fixed assets at the investment side of it. And so Keynes and others, we think of kind of this mass consumption economy, is what they were going at, like you said, food stamps or others today, the time they were overwhelmingly focused on production, is that production is what drops off an economy, you get the production up again, especially of these heavy industries long term that's going to get the money in people's pockets and start driving things. I mean, they were right, about how the economy was acting that those sectors have fallen off the cliff. I mean, I would just say that is, that was probably a problem with the Federal Reserve, sculpting the economy in general. And that just happens in a recession. And then again, trying to identify the specific sectors the government has to bolster up is probably is not as helpful as just creating overall demand and allowing those to get back up as well.

Michael Manville  1:07:57  
Yeah, and I think we see it, you know, in macroeconomics, today, much less, it's not extinct, but much less sort of sector specific obsession, when these things happens, but but if you had that worldview, it was very understandable that you would look at construction,

Judge Glock  1:08:10  
it did fall off.

Shane Phillips  1:08:13  
So before we wrap up, I do want to give you the opportunity to strengthen the connection to federal bailouts here since that is the other half of your story. We talked about the bailouts that happened at the time, but I think you're implicitly or at the very end explicitly connecting this to more modern bailouts. I think most of our listeners are probably familiar with the role of housing in the more recent Great Recession, and the bank bailouts that followed. But I don't think this is really appreciated how central mortgages have been to bailouts throughout US history. I certainly did not appreciate that before reading your book. So tell us a little bit more about how this all connects to the present day?

Judge Glock  1:08:49  
Yeah, so as I mentioned, a lot of the supports that were created to bolster mortgages were also created to provide both a new product for banks, and to allow the government to bail out those banks, and if they got in trouble, and that's exactly what you saw in the Great Depression to an unprecedented extent, the government in both the federal land banks expansion, in the Federal Home Loan Banks, in the expansion of the Federal Reserve to directly loan to some individual banks, they were trying to say it's our job to keep the financial system stable. That's one of the preeminent jobs of the federal government. And that wasn't previously seen as one of the jobs of the federal government and mortgage loans precisely because you had seen such a collapse in the housing and foreign markets were seen as the kind of crux of that whole financial stability program. And they were also seen that way by FDR and just I tried maybe with excessive detail, show the listener how clear FDR was of like, "I do not want the financial system to clamp". This program in the 1937, discretion is supposed to get mortgage lending going again, we need the banks to support so they can make these long term loans to get the economy moving again, that connection between the banks financing long-term loans, creating those long-term assets, and then getting the economy on an upswing again, has been pretty consistent, and was obviously pretty similar to what Ben Bernanke and others tried to do in the 2008 crisis. But those programs we created, as I also tried to show probably didn't have the best track record record. So in 37, in early 38, FDR created Fannie Mae, obviously that was bailed out to the tune of, along with its sister Corporation, Freddie Mac, brother corporation, I guess, Freddie's a brothers...

Michael Manville  1:10:36  
Sibling, sibling corporate 

Judge Glock  1:10:37  
Siblings corporation, was bailed out at almost $200 billion. We forget that the huge bailouts in the savings and loan crisis in the 1980s, which were, of course, mortgage based.  One of the largest institutions, the Federal Savings and Loan Insurance Corporation, which was created actually as part of the same act that created the FHA, which we don't think about as much, and was created specifically to get those savings and loans banks on board with the programs. And hey, we'll give you this, it's basically one guy pounded the table and said, I'm gonna make a mess unless you give us this government guarantee for deposits. And he creates that, and that gets bailed out in the 1980s, during the savings and loan collapse, then. So this is this is fairly continuous going back almost a century now with the federal government is trying to do to use mortgages to kind of bail out the financial sector. And like we already discussed with the moral hazards there, it can be pretty damaging to how the financial system operates. And it doesn't seem as far as we can tell that a lot of these bank bailouts are doing a lot to revive the economy, as we learned in 2008, or, in the Great Depression, a lot of these bailouts just went right into the pockets of the banks and then didn't go out into the real economy. And so I tried to show that this history is both longer and is perhaps doleful as one would expect. Yeah, give a give the reader a bit of a warning about how this policy should if not be totally discontinued, obviously be kind of Cavin to a much larger extent than we do now. Government support for mortgages combined with government support for banks and bailouts for large financial institutions.

Shane Phillips  1:12:15  
And for the last question, you know, I'll say I'm very sympathetic to the Bernanke and others of the world who argue that just allowing the banks to collapse would have been worse than bailing them out. Of course, we made a lot of choices that put us in the position where those were our two choices. And I think that's part of what you're talking about here. But I just wanted to hear your musings on a great quote you included in the book from President Hoover near the end of his term in office, I think in 1932, or even 33. He's referring to Eugene Meyer, who he appointed as the Federal Reserve Chairman in 1930. And Hoover said, "Eugene and I have tried everything on behalf of the bankers, but they have fought us, haven't tried to cooperate, haven't even told the truth. They are without ability and without character, it would have been better if Jean and I had never tried to save the banks, if we had let them go, we'd be all over it now" meaning over the recession and all the economic problems, they did move past them. I take it, you maybe agree with that position?

Judge Glock  1:13:17  
Yes, and one of the subtext of the book is that Ben Bernanke, who I do have an immense amount of sympathy for and, frankly, grateful we had him as opposed to some of the alternatives we saw in say the ECB or elsewhere, Ben Bernanke did, I think, a much more important job and getting the economy back on track. But one of the things where I think it's much more questionable is he said, his research, especially his 1983 paper that partially won him, the Nobel Prize was, hey, if you look at the Great Depression, this is because these banks fail, they have this important function that intermediated credit. And if the government had supported these banks, they wouldn't have had the great depression problem they had, because it was the bank failures that led to all the others. And (what) part of my book tries to show is that government did support banks, they explored them to an immense extent in the 1930s. And they created programs that were not dissimilar to the mortgage-based bailouts that Bernanke and some of the other politicians and officials created in post 2008. So in a sense, as you mentioned, from that, Herbert Hoover quote, they recognize that they had tried to do this, they'd bailed out a lot of banks and it hadn't created the economy Upswing they had hoped for. Now, thing that did create that in early 1933 was Roosevelt increasing the money supply and going off the gold standard? That's what seemed to finally revive the economy. These bank bailouts never were more of, even though they had a lot of it, to my mind, intellectual and academic support at the time and subsequently, they didn't seem to have much to do with reviving the whole economy as opposed to just increase total demand or increase money supply. We now know historically was one of the main problems with the Great Depression. So yes, I think the failures of the bank bailouts in the Great Depression to solve that crisis as Hoover himself recognized, and the problems that those bank bailouts great subsequently, which, as you said, created the problem and created the situation where banks were in a very precarious spot in 2008. Because of those moral hazard problems and government guarantees. That's something that has not been a very productive policy for America.

Michael Manville  1:15:21  
Before we close it out, I'm just gonna make like a general plug here. Because I think in some ways, this episode has been very different from the typical Housing Voice podcast episode, you know, we often talk about housing policy in housing's role as shelter, right? We have episodes on like should tenants have right to counsel. And one of the reasons I was so excited to have Judge's book included is that I think a lot of what we've discussed here really reveals the extent to which commonplace aspects of housing consumption in the United States today are rooted in something that housing scholars don't often dive into, which is just its huge role in the macroeconomy, right? The fact that its characteristics make it something that requires a lot of long term finance. It's a lot of money. It's a vexing problem from a macroeconomic perspective. And in the background of everybody's ordinary business of like consuming housing, are these machinations right of like, how do we solve that financial problem, and it just pops up periodically in the form of a bank crisis or a bailout or something like that? And so I think, you know, I understand some of our listeners might have gone through this episode, maybe like, you know, where's the vouchers or something like that. But this is... it's a huge, it's sort of like the bottom half of the iceberg of housing policy, right? This is a giant part of our economy that has very particular financial complications. And there's a huge a huge number of people who do not consider themselves housing policymakers trying to solve it. And they are sort of making housing policy almost without intending to,

Judge Glock  1:16:57  
Exactly. By some measures, the US mortgage market is the second largest financial market on Earth, rivaled only by the US Treasury market. So forget corporate bonds, forget all these massive markets that financiers in Wall Street and elsewhere deal with , we're talking around about, I have to double-check, but around 12 or $13 trillion asset classes US mortgage bonds. And so this is undergirding, of course, a large part of our financial sector, a large part of the global financial sector. And like you said, it's of course, all based on these things that individuals are sitting in and eating their lunch in or working in these days. But it has massive effects on how our entire financial and macroeconomic system works.

Shane Phillips  1:17:41  
All right, Judge Glock, your book again is The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913 to 1939. Thank you for joining us on the UCLA Housing Voice podcast.

Judge Glock  1:17:52  
Thank you so much for having me.

Shane Phillips  1:17:58  
You can read more about Judge's work on our website, lewis.ucla.edu. Show notes and a transcript of the interview are there too. The UCLA Lewis Center is on Facebook and Twitter. I'm on Twitter at @shanedphillips, and Mike is at @michaelmanvill6. Thanks for listening. We'll see you next time.

Transcribed by https://otter.ai