The Unraveling of the Federal Home Loan Banks

The Federal Home Loan Bank system is a $1.3 trillion government-sponsored enterprise that operates primarily for the benefit of member financial institutions. Federal Home Loan Bank members enjoy generous dividends and ready access to fresh liquidity. The biggest beneficiaries are the biggest users of the system, including the largest banks and insurance companies in the country and banks facing financial distress. This essay explains the original aims of the Federal Home Loan bank system, how the system fulfilled those aims quite successfully for decades following its creation in 1932, and how the system evolved to serve aims so far removed from its original design. By recovering the early design of the Federal Home Loan Bank system and the conditions that allowed the system to serve public aims, this paper provides a fresh blueprint for how it could and should be reformed.