Friday, July 15, 2011

Mortgage backed securities, 1916 style

I'm reading up on the rural credit system in the late 19th and early 20th century now because I'm writing two more short articles for the Encyclopedia of American Populism.

An interesting thing I came across is the system of mortgage backed securities that emerged with the Farm Loan Act of 1916. These MBS's are somewhat different from the ones that caused the current financial crises, though. They can only be issued by farm loan banks on the security of mortgages that they issue, so there's none of this problem of reselling mortgages to multiple firms. The banks presumably know a lot about the condition of the mortgages. Mortgages are also fairly safe - at most they can have a 50% loan to value ratio, and an interest rate not exceeding 6 percent. The MBS's can't have an interest rate exceeding 5%, nor lower than 1% less than the mortgage they're secured by. The bank is also on the hook for investigating the title, appraising the value of the land, etc. So nobody's going to make a mint off of this and the MBS issuer has a ton of skin in the game. I don't know how all this turned out just yet, but I'm guessing these didn't lead to a financial crisis.

I'm also reading more about the crop lien system in the South which read to a lot of these calls for rural credit reform. I had read about this earlier in Ransom and Sutch's One Kind of Freedom, which I recommend. It's incredibly depressing stuff. Crop liens often amounted to a reinstitution of slavery.


  1. FWIW, the historiography since the 1990s has leaned pretty heavily against Ransom and Sulch's analysis - and not surprisingly. I myself am pretty skeptical of that sort of institutional analysis for a number of reasons (not the least being the sort of normative claims which such an analysis requires).

  2. I mean, there are just a lot of problems with the whole post-war South was all about "peonage" school of thought that arrived full force in the 1970s. There was just far too much mobility in the New South for that to be case (that's partly why the linchpin of this system of rural credit, rural stores, went belly up so much - people would just up and leave them holding the bag). There is a lot of movement in the New South, far more than was generally appreciated at one time, and you just can't have a system of peonage with that going on. I really don't think this was neo-paternalism, or whatever; it was just many possible systems of market relations in a largely capitalist order. That's not to suggest that it didn't suck deep and hard, but the level of autonomy was far, far greater under it than had been the case during the period of slavery. That's the reason why you see so many independent black institutions emerge in the New South at the time - leading to cities like Durham, N.C. being called the "black wall street" and the like, to the advent of largely independent black churches, black educational institutions, etc. That's not to discount the real horrors of the Black Codes, the onset of the "Redeemer" southern state governments, but none of that constituted peonage.

  3. Again, I'm going to have to ask you to get specific when you make claims like this. I'm working through a lot of modern material that doesn't lean against them at all.

    Are you saying there is some sort of unreality to the crop lien system? I find this implausible, Gary. Please cite.

    There were some disagreements over exactly whose interests sharecropping served. My understanding is that while alternative positions were raised, it's not like everyone abandoned R&S on this point. But that question is entirely irrelevant to the rural credit system issues that I'm talking about here.

    But, as if often the case, I really don't have any clue what you're talking about because you're not providing details.

  4. OK - you have a new comment.

    Right - it was precisely the trap of debt peonage that gave people the incentive to (1.) move west, or (2.) form populist parties.

    And we've known this since... well since the 1970s. I've got Goodwyn opened up on my desk to page 23 right now where he's talking about this, and that was published a year after Ransom and Sutch.

    You can talk about these incentives without saying that debt peonage is some sort of imagined institution. It gave a lot of incentives for people to move. But a lot of others couldn't just do that, and it was especially hard if your skin was a few shades darker than yours or mine.

  5. This is what bothers me about historians. They always trump up the claims of earlier work so it makes their own work look more dramatic. If you read the original work that's being crticized, it's never as strenuous as the revisionists present it as being. It usually just has different emphases.

    R&S did a great job outlining the operation of the crop lien system and the impact it had on the organization of agriculture in the ante-bellum south, and the pressures it put on certain groups.

    Other people focused on how those groups responded to those pressures, and low and behold they didn't just sit idly by.

    That all sounds right, doesn't it?

    But the revisionists get more press by accusing the earlier writers of neglect. If you read R&S obviously they paint debt peonage in depressing tones because it was a real crappy system. But the point of the book was to describe the operation of the system, not to promote the idea that there was no way out of it or response to it. Indeed, the picture they paint presents a POWERFUL INCENTIVE TO RESPOND. It should be read as complementary too the later work which fleshes those issues out in more detail.

    But of course, historians don't present it that way because persenting it that way wouldn't be nearly as dramatic. Historians can be real drama queens sometimes.

  6. You can't call it a "trap of debt bondage" if lots of people can escape it either individually or generationally; and lots of black people escaped it in all manner of ways. Debt bondage never solidified in the New South in other words and what of it that existed was blown apart by the advent of the automobile, the Sears & Roebuck catalogue, people running away from their debts, etc.

    This is their thesis: "Our thesis is that the lack of progress in the postemancipation era was the consequence of flawed economic institutions erected in the wake of the Confederate defeat." That's on page 2. I beg to differ; I think there was a great deal of progress and that institutions emerged to escape whatever debt bondage existed in the New South. That within a very rapid period of time there was a general improvement over conditions as they existed before the Civil War - which as the history of emancipation throughout the world has shown us is a difficult process at best. So yeah, I just don't buy this whole descent back into slavery line of reasoning; that just didn't happen.

    Dude, I've never seen a spectacle more shrill than having economists of varying schools debating each other in the same room.

  7. Gary, perhaps I'm just dense but I'm still not seeing this great, controversial distinction between the two ideas.

  8. Sorry, I may have missed this but can I get a citation on how easy it was for sharecroppers to move?

  9. You're in dangerous territory, Andrew! I was just going to concede that point since it's essentially a matter of degree and you can argue matters of degree till the cows come home.

    This did drive Western settlement. Goodwyn (1978) talks about how "G.T.T." became a commonly understood thing to scrawl on peoples' doors (Gone To Texas).

    That doesn't mean, of course, that sharecroppers could go on their merry way whenever they wanted. But that's fight I didn't have the energy to pick. It seemed like less work (but still plenty) to just impress upon Gary that the crop lien system did actually exist and it sucked to be a part of it. If I can do that, I'll call it a victory.

  10. I never claimed that it didn't exist (see what I said above) or that it didn't suck (though I would argue that it was generally a better situation than what came before); I merely challenged the notion that it was or "amounted to" a reinstitution of slavery.

    And Daniel, sharecropping is not the same as a crop-lien system. Some sharecroppers did take out crop liens, but so did tenant farmers as well as people who owned their land in fee simple. I'm sure you could draw up a pretty complicated Venn diagram describing all the moving parts. Anyway, unlike with sharecropping or tenant farming the supposedly exploitive party was a merchant (a rural one or one in a small town) - someone who was also often in a precarious financial situation (it is one of the reason why the rural American south is littered with forgotten towns - once the main merchants went belly up everyone fled for somewhere else - if you actually tour the rural south you can find them everywhere - you just have to look for their tell tale signs).

  11. Yes, the post-war situation was better than the antebellum situation.

    Yes, crop lien is a credit system that is entirely different from agricultural and labor arrangement that was sharecropping.

    I could be wrong, but I think commenters are aware of these points.

    If this is the extent of your claim, then I'm not sure what the big fuss is over Ransom and Sutch. I hadn't read them to be saying that slavery had ACTUALLY been reinstituted.

  12. Andrew,

    Daniel is largely annoyed with the fact that I won the internets today with my "silly walks" comment. I'll give him slack though.

  13. "Crop liens often amounted to a reinstitution of slavery."

    Daniel, this is the non-sense that I am getting at.

    As far as R&S are concerned, their main thesis is (1) far too pessimistic and (2) depends on an institutional analysis that I think is flawed.


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