A New Head for the Fed

Here's what new Fed Chairman Kevin Warsh might be thinking about right now.

Published in Law & Liberty.

Being chairman of the Federal Reserve Board, which includes being its chief executive, is one of the very top jobs not only in the country, but in the world. In the US, the Fed is the central bank, money printer, inflation-creator, and emergency lender to the world’s most important economy and financial markets; it is also all of those to the global dollar-denominated system of payments, borrowing and investing. Its new chairman, Kevin Warsh, is highly intelligent and knowledgeable in finance, economics, and politics. He is also very thoughtful. Here are five of the issues he is or might be thinking about.

1. Shrinking the Fed: Chairman Warsh has been clear about his interest in shrinking the bloated balance sheet of the Fed, and in reducing its heavy interventions or so-called “footprint” in financial markets. In the first quarter of this year, the Fed grew by $35 billion, bringing its total assets to $6.9 trillion as of March 31, 2026. That is 7.5 times as big as the Fed was at the end of 2007, when it produced its last historically normal balance sheet. Ever since then it has been in the Ben Bernanke-induced, abnormally inflated balance sheet mode, which Warsh has often rightly criticized. Although Bernanke, when he was Fed Chairman, promised Congress that this would be temporary, it has not been, but has lasted more than 17 years, so far. Can the Fed shrink back to normal?

At the end of 2007, the Fed’s total assets were $894 billion. That was 6.2 percent of nominal GDP and 8.3 percent of commercial banking assets. To get to these same percentages today, the Fed would have to shrink by more than $4 trillion, including selling a couple trillion of long-term Treasury securities. In 2007, the Fed’s investment in mortgage-backed securities was zero, which is what it should be. How the Fed convinced itself to become and remain the biggest investor with the biggest footprint in mortgages is a puzzle indeed. To get back to zero, it would have to unload its $2 trillion in MBS, the purchase of which so distorted the mortgage market and house prices.

Chairman Warsh has of course considered how any material sales of investments to shrink the Fed would make the prices in the Treasury bond and MBS markets go down and their interest rates go up. Should the Fed push bond and mortgage interest rates up, increase the Treasury’s interest cost, and make houses even less affordable? That seems to have no chance of being a political winner.

On top of that, the Fed has a mark to market loss of $546 billion on its Treasury investments and a loss of $311 billion on its MBS. To sell them would be to move such losses from unrealized, “paper” losses, to realized, cash losses, which would have to be reported on its profit and loss statement. The Fed’s total mark to market loss of $857 billion is about 18 times its total book capital of $48 billion. The Fed insists that nobody cares about its losses, but such numbers would be truly enormous, embarrassing, and obviously poor PR.

Shrinking the Fed looks desirable, but is apparently a longer-term, not a short-term, project. Since the Fed’s most important function is to finance the government of which it is a part, I have suggested that a reasonable longer-term target size for the Fed might be 10 percent of the national debt. Today, that would mean a Fed about $3 trillion smaller than it is.

2. The Unknowable Right Interest Rate: Eight times a year we are treated to the melodrama of the Fed’s Open Market Committee meeting to set, and since the Bernanke time, to forecast with their “dot plots” interest rate paths. Upon reflection, it should be clear to everybody that no committee, including this one, can actually know what the right interest rate is, and certainly it cannot know what future interest rates will be. The committee’s forecasting record makes that apparent. As then-Fed Chairman Jerome Powell so rightly observed, “We are navigating by the stars under cloudy skies.” I think this saying should be forever enshrined in Fed lore right next to William McChesney Martin’s famous “punchbowl” line.

Chairman Warsh seems inclined to get rid of the “dot plot” forecasting and any inclination for the committee members to feel committed by their past recorded guesses. This is a good idea. In addition, will he privately brood about the larger question of whether it really makes sense to have a national price fixing committee for interest rates?

3. Perpetual Inflation at 2 percent?: Among the Fed’s heirlooms from the Bernanke years is the notion that the Fed can on its own, without Congressional approval, commit the United States to perpetual inflation at the rate of 2 percent per year—in other words, to quintupling prices in an average lifetime. The inflation targeting regime has given us the historically anomalous experience of central bankers claiming they have to get inflation up. This regime has presided over not only the runaway inflation of 2021–22, but also current inflation at nearly twice the target rate.

It is now 14 years since the Fed unilaterally announced its target of 2 percent inflation forever. It seems like time for a critical reconsideration of it. International financial expert William White has a forthcoming article: “The Inflation Targeting Framework for Monetary Policy Needs to be Challenged.” This seems right to me. Chairman Warsh’s comments on how to think about inflation suggest he may be open to such a reexamination.

4. The Role of the Money Supply: Did the Fed and other central banks somehow forget about the perennial role of creating too much money in fostering inflation and depreciating the currency? It seems that by rejecting a mechanical relationship of money supply and prices, they embarrassingly made the opposite error, which explains their woefully wrong forecasts of inflation and interest rates in the early 2020s.

The British economist Tim Congdon, whose forecasts in this period were based on money supply and were far superior to those of the Fed and the Bank of England, concludes that “the behavior of money growth must be restored to a central position in policy-oriented macroeconomic analysis.” Chairman Warsh might be thinking about whether the Fed should take this advice.

5. Thinking Clearly About the Fed’s Finances: Among other things, the Fed is a giant financial enterprise. It is designed to make money for the government, but in recent years has lost heavily instead, with combined reported net losses for the three years 2023–25 of $211 billion. To this should be added the $857 billion in mark to market losses discussed above.

The Fed reported a net profit of $1.4 billion in the first quarter of 2026, but this modest profit was only possible because the Fed is being heavily subsidized by the US Treasury. The Treasury does this by holding vast interest-free deposits in the Fed—of $893 billion on March 31 of this year. At current interest rates, these will give the Fed $33 billion in profit, which it will not return in remittances to the Treasury this year, only in the hazy future. This increases the current year’s federal deficit and runs up the national debt by the same $33 billion—not a very good deal for the Treasury or the taxpayers. To fix it, the Fed should simply pay the Treasury interest on its deposits, the same way it pays interest to banks.

For clarity, you can divide the Fed into three main functions: issuing currency, which at current interest rates makes profits of about $87 billion a year; the $33 billion in profit from the Treasury subsidy; and then everything else, which includes the Fed’s trillions in underwater long-term investments. This third function appears to be making losses at the rate of about $113 billion a year.

As chief executive of the Federal Reserve and a financial expert himself, Chairman Warsh might be thinking of how to provide rigorous explanations to Congress of the Fed’s financial performance, balance sheet and financial outlook, making these clear to the legislature, which is his boss.

Lives Entwined in the Great Stock Market Collapse

Published in Civitas Outlook.

Ross Sorkin's 1929 is not a book about macroeconomics, the causes of economic cycles, or theories of financial market behavior. It is a book about people.

In the Afterword to 1929, Andrew Ross Sorkin reflects that in this book, he wanted “to restore the texture and detail of the human lives at the center of an epic historical event. Who exactly were the people caught up in it, what did their lives look and feel like?” In this, Sorkin has fully succeeded. He has created a most readable account of the personalities, careers, opinions, decisions, actions, hopes, fears, risk-taking, and sometimes descent from hero to bum of those entwined in the intoxicating boom and crushing bust of the 1920s stock market. We can’t help being interested in the characters he deftly portrays.

This book is not about macroeconomics, the causes of economic cycles, theories of financial market behavior, or the author’s proposals for institutional redesign or grand reforms. There are no mathematical formulas or graphs, and no statistics, other than reporting the heady rise and headlong drop in stock prices of the time, and, in later sections, the staggering numbers of bank failures. It is a book about people.

In Sorkin’s drama, they appear in five acts:

-Life and personalities at the top of the great 1920s stock market bubble

-The Crash of October 1929

-The deepening Depression, leading to the banking panic of 1933

-Hoover exits; Roosevelt creates a heroic role for himself

-Aftermath: 1930s Congressional investigations, reform legislation, and criminal indictments; the later life of the characters.

A problem with writing this kind of history is that readers already know, in general, what happened. This can impart to the drama a retrospective inevitability that did not exist for the people at the time. Instead, they found themselves in a confusing present with an unknowable future, just as we do. Sorkin relates colorful examples of conflicting predictions of the time.

John Jabob Raskob, “one of the wealthiest men in the nation,” chairman of the Democratic National Committee, and an important character in the book, assured the public in 1929 that “with just $15 per month, ‘wisely invested,’ anyone could become wealthy through the stock market within twenty years.” Said the Literary Digest, “‘This is the greatest vision of Wall Street’s greatest mind.”

About the same time, Thomas Lamont, the second most senior partner in J.P. Morgan and Co. and a principal actor in the book, was in Europe, negotiating the restructuring of the German reparations from World War I. From there, he wrote his son, “Prices can go lower, so be sure to keep plenty of cash…I keep feeling cash is a good asset.”

The stock market reached its peak in September 1929, with the Dow Jones Industrial Average at 381. Of course, they didn’t know then it was the peak. “The market had experienced nearly seven years of uninterrupted growth,” as Sorkin observes. Had you been living then, do you think you would have been buying or selling at that point?

In that month, the brilliant and famous economist, Irving Fisher of Yale University, opined, “Stock prices are not too high and Wall Street will not experience anything in the nature of a crash.” He said, this reflected, among other factors, “inventions such as the world has never before witnessed.” (This may sound familiar.) In October, he further memorably pronounced: “Stock prices have reached what looks like a permanently high plateau.”

A sense of the times comes with another of Fisher’s arguments: The market had not yet “reflected the beneficent effects of Prohibition, which had made American workers more productive and dependable.”

On the opposite side, economist Roger Babson issued a famous forecast: “Sooner or later a crash is coming and it may be terrific. Wise are those investors who now get out of debt… The stock market boom will collapse like the Florida [land] boom.” (This is the only mention in the book of that other 1920s bubble.) Babson continued, “Sellers will exceed buyers…paper profits will begin to disappear…margin accounts will be closed out…there may be a stampede for selling which may exceed anything that the stock exchange has ever witnessed.” (Sorkin does not mention that Babson was also the Prohibition Party’s 1940 candidate for U.S. President.)

Charles Merrill, the co-founder of Merrill Lynch, gets only a bit part, but it includes his early call, which looks very good in retrospect: Merrill “had been telling his clients to get out of the market since March 1928.” But between the end of March 1928 and early September 1929, the market rose 80 percent.

So would you have listened to Merrill, or to Charles Mitchell, the Chairman of the National City Bank of New York (now Citibank), a leading banker of the day? Boarding an ocean liner for a four-week vacation in September 1929, Mitchell told the press, “There is nothing to worry about in the financial situation of the United States,” and upon his return in October, “Although in some cases speculation has gone too far…the markets generally now are in a healthy condition.” Mitchell is a prominent character in the book, starting the story at the top of Wall Street, falling hard and ignominiously in the 1930s, and rising again.

Herbert Hoover, a very intelligent and capable man, had become President of the United States in March 1929. He had long been convinced that the stock market suffered from excess speculation. Now, six months into the job, “rattled by the roller-coaster stock market and [the] conflicting comments from Babson, Fisher and Mitchell, the president dispatched an envoy [to] Lamont. … Should his administration do something to stop speculation before it was too late?” Lamont’s advice was that “Corrective action on the part of public authorities…need not at this time be contemplated.”

The Crash came. On Black Thursday, October 24, Babson’s scenario became reality with “a blizzard of sell orders…brokers liquidating the accounts of customers who couldn’t meet their margin calls… soon many stocks had no bids at all…everybody wants to sell out.”

This set the stage for the dramatic private intervention of the leaders of Wall Street. Sorkin tells the story very well. “Lamont remembered the Panic of 1907 and tried to think: What would J. Pierpont Morgan do?” The answer was for the leading firms to create a pool to buy stocks amid selling and stop the panic.

Richard Whitney, the Vice President of the New York Stock Exchange, was their broker. “At 1:30 p.m. the tall, supercilious Whitney strode unto the trading floor with a smile…to post 2 where in a loud, booming voice, he asked what the last bid for U.S. Steel had been. ‘One ninety-five,’ the specialist said ‘Ten thousand at two-oh-five,’ Whitney announced. … For a split second there was silence … Then a shout of elation went up and spread across the room.” Whitney proceeded across the floor, “loudly buying shares.” Would the plan work? It looked like it would. “The rout was halted. … Whitney was hailed as a hero [and dubbed] “Wall Street’s White Knight.”

But five days later, on Black Tuesday, October 29, it all came apart again, with renewed floods of selling and prices collapsing By the end of the day, the Dow Jones index had fallen to 230, or down 40 percent from its September peak The Wall Street elite’s best shot had failed Subsequently, despite various interim rallies and optimism, stock prices would fall for the next three years, ultimately going down by 89 percent from the peak.

Many interesting characters appear on Sorkin’s stage. Among them is Winston Churchill, out of political office, touring America to build an audience for his writing, who took time out to make heavy losses in the stock market.

There is Jesse Livermore, famous in his day as a big-time financial speculator, whose life was fictionalized in the popular 1923 novel Reminiscences of a Stock Operator. In October 1929, Livermore made huge profits by being short the market; his gains, Sorkin tells us, amounted to $100 million. Later, he lost it all and finally committed suicide, writing to his wife, “I am a failure.”

In the Washington D.C. scenes, Senator Carter Glass often appears, a Jeffersonian Democrat, great critic of Wall Street and of Charles Mitchell in particular, and co-sponsor of the landmark Glass-Steagall Act of 1933. About Black Tuesday, he said with schadenfreude, “It is just the result of Mitchellism … It is a sign the gamblers have reached their limit.”

As Sorkin takes the story into the 1930s, the Depression involves thousands of bank failures, literally. Hoover, having lost the 1932 election by a landslide, faced a nationwide bank panic during this lame duck period. He tried to get the newly elected Franklin Roosevelt to work with him on a national bank holiday, but Roosevelt refused.

With the country in the midst of a banking crisis, Hoover was outplayed by the master politician, manipulator, and rhetorician, Roosevelt, who then could take center stage as the hero with his own national bank holiday, using much of the material already worked out by the Hoover administration, and launching the New Deal, which dominated the rest of the 1930s. Near the end of that new drama, we may note, with Roosevelt’s policies, the 1939 unemployment rate was still 17 percent—but that is a different book.

1929 does not take up and is not interested in how the stock market finances productive investment, entrepreneurial ventures, and economic growth, and produces long-term profits. It focuses rather on how it can generate excesses, like the huge 1920s bubble and bust. Sorkin muses on the last page that overall “People will find new ways to believe the good times can last forever … humanity will again and again lose its head.” However, fundamental uncertainty means we can’t have one part of this fascinating combination without the other, and it is highly unlikely that we in the present are any smarter than the characters caught in the great drama of a century ago.

Seven Questions for Kevin Warsh, Newly Confirmed as Chairman of the Fed

And some startling answers from the Sun’s monetary columnist.

Published in The New York Sun.

The Federal Reserve is at the center of the pure paper money system of the United States and the world. As the Fed transitions to a new chairman, it is timely to consider some questions about this remarkable, powerful, dangerous, and allegedly “independent” institution. Here are seven questions for the new chairman, Kevin Warsh, and his colleagues:

Do we need a national price fixing committee for interest rates?

Answer: No.

Nothing is more obvious in free market economics than that having centralized price fixing by the government is a really bad idea. The constant discovery of clearing prices by competitive markets is what is needed. Yet the Fed’s Open Market Committee is a national price fixing committee by another name for one of the most important prices: interest rates. Amazing mistake, if you think about it.

Does the Fed know what it’s doing?

Answer: No.

As the outgoing chairman of the Fed, Jerome Powell wittily and correctly said about the Fed, “We are navigating by the stars under cloudy skies.” So it is, and so it must be. Neither the Fed nor anybody else ever knew or ever can know what the correct interest rates are. To do that they would have to know the future, and the economic future is always uncertain, not only unknown but unknowable. The Fed’s forecasting record is poor because it cannot know what it is really doing.

How much money has the Fed lost on its “QE” gamble — and whose money was it?

Answer: It has lost more than $1.3 trillion of the taxpayers’ money.

The Fed made a gamble on what it called “Quantitative Easing,” or “QE,” described by its chairman at the time, Ben Bernanke, as a “shot in the dark.” It was a macroeconomic gamble that stoked asset price inflations. It was a financial gamble with the Fed’s own earnings and capital.

The huge resulting total losses are the sum of three factors. The Fed reported net operating losses of about $220 billion since 2022. In addition, the QE losses wiped out more than $300 billion in profits the Fed made by issuing currency and holding interest-free deposits from the Treasury.

So quantitative easing’s operating losses exceed $500 billion. On top of that, QE has resulted in mark-to-market losses of $844 billion. In sum, the more than $1.3 trillion in losses mean that the costs will be borne by the taxpayers and suggest that the Fed has lost the entire $47 billion capital of its commercial bank shareholders about 27 times over.

Does the Federal Reserve Act assign the Fed a goal of “price stability”?

Answer: No.

“Price stability” is a tricky term that means, according to the Fed, perpetual inflation at some rate it chooses. It means that overall prices always rise. That is not what the Federal Reserve Act says. The Act assigns to the Fed an objective of “stable prices,” a clear term. It means prices that are stable. In other words, it means average inflation of approximately zero. The Fed was rhetorically clever to use “price stability” in all its presentations when it decided to pursue perpetual inflation, since it obviously was not pursuing stable prices.

Should the Fed have a monopoly in American money?

Answer: No.

As suggested by Friedrich Hayek in “Competition in Currency,” an essay now canonical among cryptocurrency enthusiasts, to control a central bank’s urge to impose inflation on the people, one could create competition in currency. Then the people could use the money they believe will best hold its value. The same essay shows that what Hayek really wanted was a renewed monetary role for gold to evolve from this competition.

Could there be a renewed monetary role for gold?

Answer: We should try to develop one.

The Fed might start by owning some gold to diversify its assets. Today, unlike most major central banks, it owns exactly zero gold and so has missed out on the great gold rally, which was really the great depreciation of the Federal Reserve dollar — by 99 percent against gold since 1971. Various American states have projects to make gold a legal tender, which might allow 100 percent gold-backed electronic currencies to compete with paper dollars.

Should the Federal Reserve be “independent”?

Answer: No.

No part of the government in any branch should be an independent fiefdom. Fundamental to our constitutional republic is that every part of the government must be a part of our system of checks and balances. In the Fed’s case, this means there needs to be much enhanced accountability to the Congress.

Fannie, Freddie, and the National Debt

Published with Edward J. Pinto in Law & Liberty.

Fannie and Freddie are part of the government and need to be included in its consolidated financial statements.

Fannie Mae and Freddie Mac are huge, with $7.8 trillion in assets and $7.6 trillion in liabilities. They are an essential part of the finances of the US government. But we do not find them as part of the government’s consolidated financial statements. We should.

This is due not only to their sheer size but also because of the giant taxpayer risk they represent, the government’s principal ownership of them, the total government control of their operations, and the obvious fact that these conditions are not temporary but long-term and ongoing. We believe that without consolidating Fannie and Freddie, a true and fair view of the government’s financial condition is not possible.

We understand the natural desire of politicians to keep Fannie and Freddie’s $7.6 trillion in liabilities off the government’s consolidated books. Accurately recording these obligations would increase the reported amount of government debt held by the public by about 25 percent—from $30.8 trillion to $38.4 trillion as of December 31, 2025. With Fannie and Freddie correctly consolidated, the total government debt would be $46.1 trillion.

Obviously, it is politically tempting to keep the obligations Fannie and Freddie impose on the taxpayers pushed obscurely down into the footnotes. Indeed, to get Fannie’s debt off the government’s books was the very reason for making it a so-called “government-sponsored enterprise” in 1968, a status later repeated for Freddie. We suggest that this twentieth-century idea has become obsolete.

Fannie and Freddie’s nature has changed radically in this century. When we apply the current facts about them to the governing accounting principles of the Federal Accounting Standards Advisory Board (FASAB), it appears the 2008 decision not to consolidate them is no longer defensible. To summarize today’s reality, Fannie and Freddie are no longer government-sponsored, privately-owned, and managed enterprises. Instead, they are government-owned and government-controlled agencies. Nothing is clearer than that the taxpayers are on the hook for all their debt and risk, and that government officers are fully in command. They are just parts of the government now and should be accounted for accordingly.

The governing “Statement of Federal Financial Accounting Standards No. 47, Reporting Entity,” defines the criteria to decide between a “consolidation entity” included in the government’s consolidated financial statements, and a “disclosure entity” which resides in the footnotes, off-balance sheet. These criteria are whether “as a whole, the organization: a) is financed through taxes and other non-exchange revenues; b) is governed by the Congress or the President; c) imposes or may impose risks and rewards to the government; and d) provides goods and services on a non-market basis.” Note 1 to the US Government Financial Statements adds the view that Fannie and Freddie’s “relationship to the government is not expected to be permanent.”

Taking these in order:

Fannie and Freddie’s financing completely depends on the government.

All of Fannie and Freddie’s revenues and financing depend upon the guarantee of their obligations by the government. Without this guarantee, neither of them could exist for a day. This guarantee means their revenue depends on access to the taxing power of the government. Moreover, the guarantee is provided to them for free, the essence of a non-exchange arrangement. This is a permanent arrangement.

There is no non-government governance of Fannie and Freddie and has not been for more than 17 years.

It is often said that this guarantee is “implicit,” but no informed person doubts that it is real. And everybody is right about this. President Trump, for example, has confirmed the government guarantee of Fannie and Freddie and stated that it will be retained. We feel sure that the reality of this guarantee, essential to Fannie and Freddie’s very existence, is a view shared by the US Treasury, by all Fannie and Freddie’s customers and creditors, and by FASAB, too.

Fannie and Freddie’s equity financing also depends on the government. The government’s stake in their equity is a $367 billion liquidation preference in their combined senior preferred stock. Subtracting this government stake from their total equity of $179 billion would leave them both technically insolvent, with a combined non-government equity of negative $188 billion. On top of this, the government has the right to acquire 79.9 percent of the common stock of both for one-thousandth of a cent per share. This totals to less than $55,000.

Fannie and Freddie are completely controlled by the government.

Fannie and Freddie are entirely subject to their conservator, who is the director of the Federal Housing Finance Board. Under the law, the conservator wields the complete power of their boards of directors and executives as well as being their regulator, and moreover, he has made himself the chairman of both of their subordinate boards. The director of the FHFB is removable by and responsible to the president of the United States. An excellent recent example of Fannie and Freddie’s governance is their instructions from the government to buy $200 billion in mortgage-backed securities. As reported by National Mortgage Professional, “In early January, President Donald Trump said he is ordering his ‘representatives’ [Fannie and Freddie] to buy $200 billion in mortgage bonds to bring down housing costs … FHFA Director Bill Pulte said on X that Fannie and Freddie will execute the purchase.”

There is no non-government governance of Fannie and Freddie, and has not been for more than 17 years.

Fannie and Freddie impose large risks on and offer rewards to the government.

Because it guarantees their $7.6 trillion in obligations, the government remains fully at risk for big losses at Fannie and Freddie, which may occur, just as it did when Fannie and Freddie went broke from bad loans in 2008. The Treasury provided them a $190 billion bailout, buying senior preferred equity that it still owns. Conversely, when Fannie and Freddie have been profitable under current arrangements, the government has benefited by dividends it has received, or by increases in the liquidation preference of its senior preferred shares, in effect, a dividend in kind. Any increase in the value of the Treasury’s option to acquire most of Fannie and Freddie’s common stock for less than $55,000 would also be a reward.

Fannie and Freddie provide financial services on a non-market basis.

Fannie and Freddie operate at extremely high, non-market leverage. Most of their earnings are made possible by their non-market, free guarantee from the government, for which, by the way, neither has ever paid even one cent. We have calculated that if they had to pay a fair rate for their $7.6 trillion of free government guarantee, it would absorb 50 percent to 100 percent of their pre-tax profit. The entire political rationale for Fannie and Freddie’s existence is that they create mortgage financing at interest rates below what the market would offer, possible only because of their deep links to the government, of which they have now become simply a part.

The characteristics that make Fannie and Freddie “consolidation entities” are not temporary, but are long-term or permanent. Having the government guaranty, being financially dependent on the government, imposing large risks on the government, and operating on a non-market basis are all permanent parts of Fannie and Freddie. Being mostly owned by and completely controlled by the government is not temporary, since it has been going on for 17 years, and the situation has outlasted many attempts at legislative reforms or attempted so-called “privatizations.” There appears to be a strong probability that the current situation will simply continue. President Trump has said as much: “I will stay strong in my position on overseeing them as President.”

Considering all these elements as a whole, we conclude that Fannie and Freddie should be consolidated in the US government’s financial statements. As a result, the proper consolidated total of government debt is $7.6 trillion greater than officially reported.

Letter: Here are three things the Fed is actually good at

Published in the Financial Times.

Your Big Read feature “Is Warsh set to be the next Fed fall guy?” (April 20) repeats a myth which should be long dead: that the Federal Reserve’s job includes “the management of the biggest economy on the planet”.

On the contrary. To “manage the economy” would require knowledge of the future that neither the Fed nor anyone else has, or can have.

At its creation in 1913, it was thought that the Fed would prevent future financial crises and panics. Obviously it didn’t.

In the heyday of Keynesian hopes in the 1960s, it was thought that the Fed could be part of ending financial cycles. Obviously it couldn’t.

As Fed chairman Jerome Powell brilliantly observed in August 2023, the Fed is “navigating by the stars under cloudy skies”. So it is and always must be.

The Fed actually is good at three things. One, printing money to finance financial crises. Two, creating constant inflation and depreciation of the currency it creates, and three, supporting the power of the government by monetising the government’s debt.

But “managing the economy” is far and forever beyond its capability.

How Much Should the Federal Reserve Shrink?

Whether our central bank should or could shrink, and if so, how much, has become a topic of public debate. 

Published in The New York Sun.

Robert Higgs, in his book “Crisis and Leviathan,” shows how the size, power, and intrusiveness of the government feed on crises. With each crisis, the government becomes bigger. After the crisis is over, it may shrink some, but it rarely goes back to its former size. 

The bloated balance sheet of the Federal Reserve is a perfect demonstration of this phenomenon. At the end of 2007, before the panic of 2008, the Fed produced its last historically normal annual balance sheet. It had total assets of $894 billion. It owned zero mortgage securities.

During the ensuing years, the Fed vastly expanded its balance sheet to a size that was previously unimaginable. By Peak Fed in March 2022, it had total assets of $8.9 trillion, or 10 times its 2007 level. It had investments in mortgage securities of $2.7 trillion, three times its total 2007 assets.

Since then, just as Mr. Higgs would predict, the Fed’s size has been reduced, but to nowhere near its previous level. As of the end of March 2026, the Fed’s total assets are still $6.7 trillion or 7.5 times their 2007 level and it still owns $2 trillion in mortgage securities, compared to the zero it should have. The Fed has stopped reducing its size — it is now $34 billion bigger than it was at the end of 2025.

Whatever happened to the assurance Chairman Bernanke’s gave in 2011 to Congress that “there will be no permanent increase… in the Fed’s balance sheet”? We can consider it either a memorable broken promise or a fully flubbed forecast. 

The Fed has two basic parts: the mundane job of simply buying Treasury securities with the United States currency it has the monopoly on issuing; and everything else. In 2007, the mundane “Currency Fed” had $792 billion in currency outstanding, so everything else in the Fed’s balance sheet totaled only $102 billion. 

At Peak Fed, the “Everything Else” part of the Fed, which had come to include in effect a giant savings and loan for holding mortgage assets and an even bigger hedge fund for investing in long-term Treasury securities financed overnight, totaled $6.7 trillion. In other words, the activist, interventionist, financial risk-taking part of the Fed had increased since 2007 by 66 times. As of today, that increase is still 42 times. 

The financial results of the Fed’s risk taking are an aggregate operating loss of $224 billion plus a mark-to-market loss of $845 billion, or well over $1 trillion in total. These are costs not just to the Fed itself but to the Treasury and the taxpayers. In addition, the Fed’s mortgage buying spree, by driving mortgage interest rates to abnormally low levels, pushed house prices up to abnormally high levels.

The “affordability crisis” in American housing thus significantly reflects the results of the Fed’s bloated balance sheet. Even though the Fed should get out of its mortgage investments, it certainly does not want to sell them now because doing so would create a more than $300 billion realized loss. On top of that, selling would drive mortgage interest rates up — a politically unacceptable result.

Whether the Fed should or could shrink, and if so, how much, has become a topic of public debate. How much shrinkage would it take to get the current Fed back to the 2007 base case, appropriately adjusted?

In 2007, the Fed’s assets were equal to 6.2 percent of nominal GDP and 8.3 percent of total commercial banking assets. To reach these same percentages, the Fed would have to shrink to $2 trillion in assets. This is not possible because the Fed’s assets must by definition be something greater than its currency outstanding, currently $2.4 trillion.

An essential mandate of the Fed, like all central banks, is to finance the government of which it is a part. Expanding its balance sheet is a way to force the commercial banking system to lend to the government. In 2007, the Fed’s assets were 9.7 percent of the national debt. To return to this level the Fed’s assets would need to fall to about $3.8 trillion, or be reduced by $2.9 trillion. 

A reasonable target for the normalized size of the Fed might be a rounded to 10 percent of the national debt. The Fed’s assets would then be $3.9 trillion instead of $6.7 trillion. Since we know the Fed cannot sell its mortgage securities, however, to its allowed assets might be added its $2 trillion in mortgage securities, provided that these mortgage investments be put and kept in run-off until they reach zero again.

That would suggest a current shrinkage of the Fed to $5.9 trillion, or shrinkage of $800 billion plus however much the mortgage assets run off. Of course, in the next crisis, all bets are off and the Fed’s balance sheet may bloat once more.

Event video: The GENIUS Act in Practice: Key Questions for Stablecoin Regulation

Hosted by the Federalist Society.

The GENIUS Act of 2025 was a watershed moment in the legal framework for stablecoins, but now implementing regulations are due in July, and many key questions are far from settled. How will the regulation will be carried out, how will systemic risks be addressed, how big a role will banks play in stablecoins, what role will stablecoins assume in the broader payment system, how will yield-bearing arrangements using stablecoins be treated, who will bear the regulatory costs?

 On March 31, 2026, the Federalist Society's Financial Services Practice Group will convene a panel of leading practitioners, regulators, and policy thinkers to examine these questions and the implementation landscape ahead. 

Featuring:

• Hon. Michael S. Barr, Member, Board of Governors of the Federal Reserve System

• Hon. Summer Mersinger, Chief Executive Officer, Blockchain Association

• Alex Pollock, Senior Fellow, Mises Institute

• Greg Xethalis, General Counsel and Chief Compliance Officer, Multicoin Capital 

• (Moderator) Gary Kalbaugh, Partner, Cahill Gordon & Reindel

U.S. house prices are falling in inflation-adjusted terms, but that is not enough

Published in Housing Finance International Journal.

In the Winter 2025 issue of Housing Finance International, I predicted that average U.S. house prices must fall because they have gone to bubble levels – by two reputable calculations, to 30% over their long-term trend line, or 35% over being affordable on a pre-pandemic basis. In the spring of 2026, that prediction still looks good.

The house price inflation to the current extreme level was driven by the financial manipulations of the Federal Reserve, which in unprecedented fashion, made itself the biggest mortgage investor in the country by far. It bought up mortgage securities with newly printed money to amass a peak portfolio of the previously unimaginable amount of $2.7 trillion, thereby pushing down the interest rate on mortgage loans to exceptionally low levels – as low as 2.7%. In U.S. practice, that is the interest rate for a 30-year loan, with its interest rate fixed for the entire 30 years, but which is also prepayable without penalty at any time at the borrower’s option. The Fed made these very long-term fixed-rate loans abnormally cheap.

By making mortgage loans abnormally cheap, the Fed made houses abnormally expensive. By making houses abnormally expensive, it made them widely unaffordable once mortgage interest rates returned to normal, as they did and remain. Home sales fell to three-decade lows. The unaffordability of houses is now a major American political issue, exercising both the President and the Congress.

The effects on the Fed’s own finances and the government’s budget deficit are also unfortunate. The Fed’s mortgage portfolio still totals $2 trillion and is now far under water, with the most recently published mark to market disclosure showing a $323 billion market value loss. The $2 trillion pile of mortgages is also causing ongoing cash losses. Its average yield is about 1.45% less than the cost of the Fed’s deposits, so in current operating results the Fed is losing on its mortgages about $29 billion a year—these are also losses to the U.S. Treasury.

The Fed has decided, correctly, that it should bring its mortgage portfolio back to zero, where it always was for the first 95 years of the Fed’s existence, until 2008. But it does not want to sell the mortgages because of the massive market value loss it would have to realize to do so. Moreover, the Fed’s selling in any material amount would drive the price of mortgage securities down, pushing mortgage interest rates higher and making houses even less affordable. This would be politically damaging to be sure. So, the Fed is stuck with a slow run-off strategy and will maintain its mistaken role as a very large government housing bank for years to come.

Some political commentary suggests that the current unaffordability of American houses reflects that mortgage interest rates, now at about 6%, are too high. Of course, 6% seems high compared to the abnormally low rates the Federal Reserve created. But 6% is a normal U.S. mortgage interest rate, historically speaking, not a high one.

Over the last 55 years, from 1971 to now, American 30-year mortgages had an average rate of over 7%. They were over 6% for about 70% of that time. They have averaged about 1.5% to 2% over the yield of the 10-year U.S. Treasury note. Since that yield is now about 4.1%, that suggests a normal mortgage rate would be 5.6% to 6.1%. Over the long term, the 10-year Treasury has yielded on average 1.95% over inflation. With inflation at 2.7% for 2025, the 10-year Treasury would be 4.65% on historical average and the 30-year mortgage over 6%.

The problem is not that mortgage interest rates are too high, but that house prices are much too high. The solution is that they need to come down.

Of course, house prices can come down in two ways: in absolute or “nominal” terms, and in inflation-adjusted or “real” terms. As an example of the second, if nominal house prices go sideways while inflation continues, it reduces house prices in real terms. If nominal household incomes rise with inflation, they would be gaining on house prices and affordability would be improving. That might be a “soft landing” scenario for house prices. In the alternative, nominal house prices could fall on a national basis, as they did fall from 2007 to 2012.

According to the AEI Housing Center’s most recent report, national house prices increased in nominal terms by 1.5% for the twelve months to January 2026, failing to keep up with consumer inflation for those months of 2.4%. Thus, real house prices fell by 0.9%. At this rate, it would take about 29 years to correct a 30% real terms overshoot.

Viewing things on a six-month time horizon, nominal U.S. house prices as measured by the Case-Shiller 20-City Composite Home Price Index, not seasonally adjusted, fell in the second half of 2025 from an index value of 343 in June to 336.9 in December, for a six-month house price reduction of 1.8%, or an annualized rate of 3.6%. With an annualized rate of inflation for this period of 2.7%, real house prices on this index fell at an annualized rate of 6.3%. If prices falling at 3.6% nominal and 6.3% real continued, it would take about 4.4 years to offset a real 30% bubble overshoot.

There are, of course, regional differences in house price behavior. In many areas in the U.S. West and South, where house prices previously rose very rapidly, they are now falling. The Federal Housing Finance Agency reports that house prices in 2025 rose less than the year’s inflation, thus fell in real terms, in half of the 50 U.S. states and in Washington DC. They also fell in nominal terms in nine states, including the large states of California, Texas and Florida, and in Washington DC. The national total was a decline in real terms of 0.9%.

On the overall national trend, the outlook seems to be for house prices to continue falling at least in inflation-adjusted terms. However, a pure “soft landing” scenario probably moves too slowly to correct the house price bubble the Federal Reserve so mightily puffed up. It continues to appear that the U.S. can expect nominal house prices to fall on a national basis.

That will be good for affordability and good for home buyers, but not so good for those with highly leveraged home ownership or for those with lower-quality credit exposures to mortgages. The price giveth and the price taketh away.

Letter: Pensions — from Bismarck to Pennsylvania Railroad

Published in the Financial Times.

When the German retirement age was set at 65 in the 1910s, Valentina Romei makes the point that “life expectancy was below 50” (“Five ways demographics are changing the economy”, The Big Read, March 6). In fact, the historical contrast with today is even sharper than you suggest.

When the German state pension system was established by Otto von Bismarck in 1889, he set the retirement age at 70. Bismarck himself was 74 at the time.

The corporate pension plan of the Pennsylvania Railroad in 1900 adopted a mandatory retirement age of 70. Early pension plans of American states likewise set 70 as the pensionable age. Correspondingly, the 1854 hymn, “Work, for the Night is Coming” (sadly no longer in the Methodist hymnal) urged us to keep working “under the sunset skies” and to “Work till the last beam fadeth”.

On average these days, that is a long way past 65.

AEI Event Video: The Future of Fannie Mae and Freddie Mac

Hosted by the American Enterprise Institute.

Event Summary

On March 23, AEI’s Howard Husock hosted experts to examine the role of Fannie Mae and Freddie Mac—enterprises that guarantee roughly 70 percent of US mortgages and are central to housing finance. Panelists emphasized that this uniquely American system concentrates risk within government-controlled entities, exposing markets to political influence and contributing to distortions in housing prices. Speakers traced the evolution of the government-sponsored enterprises (GSEs) from hybrid public-private institutions to entities effectively controlled by the federal government under conservatorship since the 2008 financial crisis. A central concern is the GSEs’ implicit federal guarantee—unconditional and practically free—allowing public risk to generate private or quasi-private gains.

The panel outlined three main paths forward: full government ownership, privatization with explicit payment for guarantees and stronger capital requirements, or continued conservatorship under the Federal Housing Finance Agency. Panelists broadly favored a smaller, more disciplined model—treating the GSEs more like large banks—and agreed on the need to shrink their footprint by limiting the size of purchasable mortgages, an incremental reform within regulatory authority. They added that technological improvements to mortgage processes may enhance efficiency. Still, in the absence of sustained political pressure, conservatorship may persist, leaving fundamental structural issues unresolved.

—Hadar Zeevi

Agenda

4:15 p.m.
Registration Opens

4:30 p.m.
Opening Remarks:
Howard Husock, Senior Fellow, American Enterprise Institute

4:40 p.m.
Panel Discussion

Panelists:
Anne Canfield, Partner, Majority Group
Edward J. Pinto, Senior Fellow, American Enterprise Institute
Alex J. Pollock, Senior Fellow, Mises Institute

Moderator:
Howard Husock, Senior Fellow, American Enterprise Institute

5:45 p.m.
Q&A

6:00 p.m.
Adjournment

Event Description

Fannie Mae and Freddie Mac, though in conservatorship, still play an outsized role in the US housing market, guaranteeing about half of all outstanding residential mortgages and representing a massive $7.8 trillion in assets. They are without doubt systemically important concentrations of mortgage risk.

Historically, they were privately owned companies with the public subsidy in the form of a free implicit guarantee of their obligations by the US Treasury. This guarantee led to their 2008 bailout, when they received $187 billion in taxpayer support; the government’s equity interest has since grown to $366 billion.

Join AEI for a discussion on how Congress could approach Fannie and Freddie’s future structure, ownership, role in the housing market, and the extent of the risk to the Treasury they will be allowed to pose.

Bernanke’s Broken Promise: Is It Time To Shrink the Fed Yet?

Published in The New York Sun.

“It’s a temporary action,” the Federal Reserve chairman, Ben Bernanke, testified before Congress on February 9, 2011, 15 years ago. He was referring to the radical expansion of the Fed’s balance sheet begun under his leadership in 2008 by so-called “Quantitative Easing,” which monetized long-term Treasury debt and 30-year mortgage securities. By 2011, QE had inflated the Fed’s total assets to $2.5 trillion. That was 2. 7 times their $915 billion at the end of 2007, the Fed’s last historically-normal annual balance sheet.

Mr. Bernanke further testified, in what certainly sounded like a promise, “what we are doing here is a temporary measure which will be reversed.” Note that was not “may” be or “can” be, but “will” be. Fifteen years later, it hasn’t happened.  

“At the end of this process,” Mr. Bernanke continued, “the amount of the Fed’s balance sheet will be normalized, and there will be no permanent increase, either in money outstanding [or] in the Fed’s balance sheet.”  That promise, or at least prediction, stands in striking contrast with reality.

Today the Fed’s total assets are $6.6 trillion.  That is 2.6 times as big as when Mr. Bernanke was testifying, and 7.2 times as big as in 2007. 

Among the Fed’s assets all these years later we find $1.6 trillion in Treasury bonds which still have more than ten years left to maturity.  More egregiously, we find $2 trillion in long-term mortgage securities.  

The Fed’s monetization of mortgages, which has massively distorted the housing market, should in my opinion be zero, as it always was from the creation of the Fed in 1913 until 2008. Today the mortgage portfolio alone is more than twice as big as the whole Fed was in 2007.

All this doesn’t sound too “temporary.” Even if one would be tempted to paraphrase President Clinton — “It depends on what the meaning of the word ‘temporary’ is”— one would have to admit that 15 years after Mr. Bernanke’s testimony and going on 18 years after the beginning of the QE program, it does not qualify as temporary.

The question of what is “temporary” was raised by Congressman Scott Garrett in the 2011 hearing.  “What you have is a difference between one’s interpretation of what is permanent and what is temporary,” Mr. Garrett said, insightfully adding, “I imagine no Fed Chairman would ever come to this witness table and say, ‘I am engaging in permanent monetization of the debt,’ [but] describe it as, ‘I’m only taking a temporary action’…. Isn’t that correct?”

Mr. Bernanke replied, “That’s what we are doing.  It’s a temporary action.”  That was doubtless what he intended at the time, but it isn’t what happened. What this “temporary action” was going to do to the Fed’s own risk and financial performance was raised by the chairman of the hearing, Congressman Paul Ryan. “Have you done a stress test on your balance sheet?” he responsibly asked.  “And what level of losses do you think is acceptable as you withdraw?”

The Fed’s most recent published mark to market of its investments, as of September 2025, provides the future answer to Mr. Ryan’s question: There would be a loss of $856 billion required to liquidate the Fed’s long-term investments. To this sum must be added the Fed’s accumulated operating losses of $224 billion since 2022, all caused by the financial risk of QE. If one uses only the losses of the QE program itself, removing the profits made by other parts of the Fed, the QE-alone operating losses since 2022 exceed $500 billion. These are equally losses to the U.S. Treasury.

Would Mr. Ryan have thought that “acceptable”?  Would Mr. Bernanke have?

Here is what Mr. Bernanke answered: “We have done multiple stress tests. Under most likely scenarios, the fiscal implications of the balance sheet are positive… Under most plausible scenarios, this policy will continue to be profitable.” Reality turned out not to be one of the “plausible scenarios.”

It’s too bad that Mr. Ryan did not follow up by asking for a copy of the Fed’s risk analysis for Congressional oversight of the unprecedented risk of QE. For now it appears that the Fed has lost another $2 billion in the first two months of 2026 despite the enormous subsidy it is receiving from the Treasury in the form of over $800 billion in interest-free deposits. These deposits generate income of about $30 billion a year for the Fed at current interest rates. They increase the Treasury’s deficit by the same amount.

Is it finally time to shrink the Fed to its normal size?  Unfortunately, because of the giant market value losses embedded in the Fed’s QE investments, selling them would be far too expensive. So Mr. Bernanke’s “temporary action” will continue into its 19th year.

Money Still Matters

The failure of pandemic-era forecasting calls for a return to monetary basics.

Published in Law & Liberty.

Most economists and central banks utterly failed to predict the inflationary outbreak in the wake of the monetary expansion that accompanied the Covid period. That is the starting point of Tim Congdon’s new book, Money and Inflation at the Time of Covid. Considering the Federal Reserve, Congdon writes: “In 2020 none of the Federal Open Market Committee’s 18 members expected inflation above 2.5 percent in 2021. In fact, consumer prices rose by 7 per cent in the year to December 2021.” After that came 6.5 percent in 2022. 

This miss of the looming high inflation by all the Federal Reserve Board governors and the Federal Reserve Bank presidents was an embarrassing whiff to be sure. These Open Market Committee members’ corresponding interest rate forecasts missed by more than a mile, as well.

The Federal Reserve was not alone in this failure of foresight. The Bank of England “was hopelessly wrong in its inflation forecasts for 2022 and 2023,” Congdon writes. Joining them in proving forecasts may be vain were “the European Central Bank, the Bank of Canada, the Reserve Bank of New Zealand, Norway’s Norges Bank and the Swedish Riksbank … all seven organizations committed serious errors in forecasting in the 2020s.”

Did no one get the coming inflation right? Well, Cogden is forced to admit and is “pleased to say,” he did, and he documents it. “In late March and April 2020, I could see that the astonishing money explosion then under way would have inflationary consequences.” In language that highlights that there are two related, interacting and essential kinds of inflation—asset price inflation and consumer price inflation—he continues, “the first result would be too much money chasing too few assets, so that the prices of shares and houses would be buoyant in late 2020 and 2021; the second inflation would be too much money chasing too few goods and services. Consumer inflation might reach double digits at an annual rate in 2022 or 2023.” 

“On 30 March 2020,” Congdon tells us, “I sent out a special email to subscribers,” which concluded that with the rapid money growth being created, “the message from history is that the annual increase in consumer prices will climb towards the 5 per cent-10 per cent area.” It did. Then, in June 2020, he published an op-ed in the Wall Street Journal, “Get Ready for the Return of Inflation.” Inflation returned. That same June saw a co-authored think tank essay that argued, “The extremely high growth rates of money will instigate an inflationary boom [but] central banks seem heedless of the inflation risks.” They were heedless: “In 2020, the year in which the USA saw the fastest growth in broadly defined M3 money since the Second World War, the minutes of the Federal Open Market Committee contained not one reference to any money aggregate.” 

Why was Congdon able to get right in the early 2020s what so many other experts and institutions got wrong? The wrong answers, he convincingly contends, came from the fact that “in recent decades, central banks have stopped referring to the quantity of money in their policy briefings and economic commentary. The silence on money may have accurately reflected what top central bankers believed, but what they believed proved false.” There is no question that the beliefs, and fashions in the beliefs, of central bankers are among the essential macroeconomic factors.

Congdon’s successful forecasts, in contrast, came from a continuing focus on the (one might think obvious) relationship between and the creation of money and inflation of both asset prices and consumer prices in the medium term. “The neglect of money aggregates in Bank of England research is therefore the dominant culprit for the fiasco of its inflation forecasts,” he says.

This leads to the core conclusion of the book: 

The behavior of money growth must be restored to a central position in policy-oriented macroeconomic analysis.

Here is the conclusion as re-stated in the coda that ends the book: Central bankers “must restore references to money aggregates in their research and policy statements,” for without this, they will be “ignorant and dangerous” (about the likely results of their own actions).

Congdon is arguing for a revised version of the classic Quantity Theory of Money and points out “the ancientness” of the theory. The classic theory is represented in the famous equation MV = PT, meaning that Money supply times the Velocity of money equals the Price level times the Transactions volume of real GDP. Thus, Money’s growing faster than the real economy makes Prices go up—as long as Velocity is fairly stable. This relationship of money expansion to inflation is intuitively appealing, and it is an enduring truth that creating a lot of excess money tends to push prices up. Central banks are very good at doing this. But critics of the classic formula are quick to point out that Velocity, which is by algebra merely the ratio of the nominal size of the economy to the money supply, is not always stable. That means the relationship is not mechanical. It is nonetheless essential, as the book argues.

Congdon is of course well aware of the historical debates. He quotes Paul Samuelson, the brilliant, Nobel Prize-winning author of the celebrated economics textbook that went through 19 editions. In this textbook, Congdon relates, the quantity theory “was said to be a ‘special, simplified doctrine,’ which most economists would not accept.” 

When it comes to brilliance, especially in economic forecasting, we must always remember Bottum’s Principle: It is easier to be brilliant than right! The failed 2020s forecasts were not the result of any lack of IQ or university degrees. Congdon cannot resist rhetorically enjoying a separate, completely failed forecast in the brilliant Samuelson’s textbook: “A recurrent assertion [that] the planned, communist economy of the Soviet Union would ultimately overtake the free market, capitalist economy of the USA.” 

Congdon’s updated quantity theory, which is less simple but appears to be more adequate than the classic version, requires three principal additional elements. First, it is based on broad money, not narrow money. Second, it must include asset price inflation as well as consumer price inflation and the effects of price changes of equities and real estate, especially residential housing. And third, it operates on a medium-term basis.

First, consider broad money. “Money” can be thought of, Congdon says, as only the monetary liabilities of the central bank or “base money”; or as including the demand deposits of the private banks, to get to “narrow money”; or as including “all the deposit liabilities of the banking system,” when “the system is consolidated to embrace both the central bank and the commercial banks.” This is “broad money.” He specifies that for his approach, “the phrase ‘the quantity of money’ should always be understood to mean ‘broad money.’” He makes a particular point of distinguishing this from the narrow money monetarism of Milton Friedman and the Chicago School. He concludes that to determine whether “too much money is chasing” assets and consumer goods with inflationary consequences, one must think in terms of broad money.

Next, asset prices. In Congdon’s quantity theory, “Changes in the value of variable-income assets (equities, real estate)—often due to changes in the quantity of money—are a central feature.” “Households care far more about the stock market and house prices than they do about bond yields.” So we need to “emphasize the impact of changes in money growth on the prices of assets like housing, commercial property and corporate equity, and the further effects of movements in these asset prices … on demand and output.” Here we have the same theory as did the Federal Reserve with its Quantitative Easing gamble to create “wealth effects.” Thus, “in the author’s view, a forecast of the values of the equity market and the stock of residential houses … has to be part of any meaningful macroeconomic forecast.” 

Finally, focus on the medium term. The money-creation to inflation effects may not be as immediate or precise as the classic quantity theory formula might imply, but on Congdon’s view, they should be expected in the medium term. Milton Friedman made “long and variable lags” a famous part of the discussion. Congdon further adds, “This is not an assertion that changes in the quantity of money and the price level are always equi-proprotional in actual experience.” He cites as an example “the steep collapse in velocity in 2008.” But over time, “the medium term relationship between money and inflation must also be quite close,” he maintains. 

I do think one recurring metaphor in the book needs revision. In many places, Congdon (like other economists) refers to economic activities as “mechanisms”—in particular, “the transition mechanism” for monetary changes. In my view, there is no “mechanism” involved. Economic events are neither mechanical nor subject to the mathematical determination that mechanisms are. They are rather interactions of human actions, ideas, intentions, strategies, beliefs, subjective valuations, hopes, and fears—including, for better or worse, the ideas and beliefs of central bankers. 

If the components of economics were mechanical, economists would by now have discovered the mechanisms, found binding formulas, and agreed with each other instead of forming perpetually competing schools. They would not have suffered the humiliating forecasting mistakes they so often have. Nonetheless, the mind can achieve powerful general insights in economics, like many in this book.

Reviewing his own text, Congdon says, “Talking of repetition, there is a lot of it in this book, perhaps too much.” He is right about that, and his discussion would have benefited from a reduction in repetition. Congdon adds, “The book is to a large extent an exercise in ‘I told you so.’” Well, yes, but the victory lap he takes is well-deserved.

All in all, I believe Congdon’s sharply pointed contrast between successful and failed forecasts is convincing, his defense of an updated quantity theory of money is well-argued, and his suggestions for central banking lessons are highly relevant.

The Fed Was Built on Non-Ph.Ds Like Warsh

See, for example, the central bank buildings named for Marriner Eccles and William McChesney Martin.

Published in The Wall Street Journal.

“The dumbest criticism,” as your editorial rightly says, of the good pick of Kevin Warsh for Federal Reserve chairman is that he “doesn’t have an economics Ph.D” (“Warsh Is the Right Fed Choice,” Jan. 31). That criticism also displays a total ignorance of Fed history. For example, the Washington headquarters of the Fed are named after Marriner Eccles, who was Fed chairman for 14 years, 1934-1948. Not only did Eccles not have a Ph.D. in economics, he never went to a university, but learned on the job as a successful banker and investor.

The nearby Fed building is named after William McChesney Martin, probably the greatest Fed chairman in my view, who served under five U.S. presidents from 1951 to 1970. Martin had a B.A., having studied English and Latin. The justly celebrated Paul Volcker, central banking hero and Fed chairman from 1979 to 1987, had an M.A. in political economy, but no Ph.D. And as you imply, the new chairman of the Fed will have hundreds of Ph.D.s at his beck and call for whatever studies he may desire.

Alex J. Pollock

Senior fellow, Mises Institute

Could — and Should — the Fed Own Gold?

Published in The New York Sun.

A world-historical financial event was the 1971 default by the United States on its international commitment to redeem dollars for gold, thereby creating a purely paper, Nixonian global monetary system. Since then, the value of the United States dollar in gold has dropped by more than 99 percent. The amount of dollars that an ounce of gold will buy has gone up by about 140 times.

During 2025, the dollar’s value in gold fell about 40 percent. Specifically, it fell from 0.38 ounces to 0.23 ounces of gold needed to buy $1,000. In 2026 so far, that has declined further to 0.20 ounces. In other words, one ounce of gold now buys about $5,000, compared to $35 until 1971. This trend has been highly profitable for the many central banks that hold gold as a classic monetary asset.

The Swiss National Bank, Switzerland’s central bank, reported a 2025 profit on its gold holdings of over 36 billion Swiss francs, or more than $46 billion. The SNB is required by law to mark all its investments, including gold, to market and report the results in its profit and loss statement and balance sheet.

Other central banks benefiting from gold as an investment and a reserve against their liabilities include, among others, the European Central Bank, the German Bundesbank, the Bank of France, the Dutch National Bank, the Bank of Italy, the Reserve Bank of India, the Bank of Japan, the People’s Bank of China, and the Monetary Authority of Singapore.

In comparison, how much profit has the Federal Reserve made on its gold? The answer is not one penny. The Federal Reserve owns no gold at all — not a single ounce. In the terse summary from the Federal Reserve’s official website: “The Federal Reserve does not own gold.”

This situation would have left the authors of the Federal Reserve Act surprised and dismayed. The law required that new Federal Reserve Banks hold gold backing equal to 40 percent of their outstanding dollar bills plus 30 percent of their deposit liabilities. One can imagine the founders of the Fed frowning down in disapproval from legislative Valhalla at the current lack of any gold held by their creation.

The original gold requirement was ended by the Depression-era Gold Reserve Act of 1934, when Congress took all their gold from the Federal Reserve Banks. From the Fed’s point of view, this was the opposite of “reserving” their gold. In exchange, the Fed got claims on the Treasury for paper dollars. With clever rhetoric, these were and are called “gold certificates.”

However, what they really certify is that the gold has been taken. The day after the taking, the dollar was devalued by 41 percent, increasing the dollars one ounce of gold would buy to $35 from $20.67. Since the Fed no longer owned any gold as of the day before, it realized no profit. The Fed has owned no gold since 1934.

The term “gold certificates” has led to widespread confusion. As probably intended by the political rhetoricians of the 1930s, the term has caused many people, even financial experts, to believe the Federal Reserve still owns gold because it has gold certificates. But the Fed’s own website is clear: “Gold certificates do not give the Federal Reserve any right to redeem the certificate for gold.” So much for the certificates and the 1930s.

Coming to today, could the Fed buy and hold gold if it wanted to?  Had it done so, after all, it would have greatly profited as other central banks have. The Fed itself is curiously quiet on this head. It appears that it does not wish to answer it, because the answer would be positive. 

Some commentators cite the 1934 act as preventing current gold purchases, but the relevant provisions of that act were repealed in 1974, more than 50 years ago. Public Law 93-373 of 1974 provides that beginning in 1975: “No provision of any law…may be construed to prohibit any person from purchasing, holding, selling or otherwise dealing in gold.” The term “any person” obviously includes the Federal Reserve Banks.

Moreover, the Federal Reserve Act in its current form provides that each Federal Reserve Bank has the power “to deal in gold coin and bullion at home or abroad.” Congress, which is the superior of the Federal Reserve, should require the Fed to answer clearly two questions: Could the Fed legally buy gold today? And if so, should it join other major central banks in holding gold among its assets?

How to End Mortgage Lock-In and Get Americans Moving Again

Old low-rate loans and capital gains on inflated values are stopping homeowners from selling.

Published with Paul H. Kupiec in The Wall Street Journal.

Many Americans are stuck in place. Since 2022, annual sales of existing homes in the U.S. have fallen to about 4.1 million—the smallest number since the mid-1990s, when the U.S. population was 22% smaller. This market is depressed despite robust economic growth. Why? Lock-in effects caused by existing low-rate mortgages and capital-gains taxes on home sales at inflated prices.

Cheap interest on mortgages from before mid-2022 are keeping homeowners from trading up to accommodate a growing family, relocating for a new job, or downsizing for retirement. Consider a home financed in December 2020 with a 30-year mortgage of $400,000 at 2.9% interest, then the national average. Under standard amortization, the homeowner’s monthly payment is $1,665.

Should the homeowner sell in December 2025, the remaining balance, due on sale, is $354,974. But today’s higher interest rates make the older mortgage a bargain. Given the national average mortgage rate of 6.27%, the remaining payments on the existing mortgage would support a loan of only $251,915. The difference, $103,059, is the capitalized value of keeping the current low-rate mortgage.

Most mortgages in the U.S. require the remaining balance to be paid off when the property is sold. Not all, though. Mortgages financed through Federal Housing Authority or Department of Veterans Affairs are “assumable,” meaning they can be taken over by qualified buyers. But the qualification process is cumbersome, and loan assumptions completed by FHA and the VA are rare, totaling fewer than 6,500, or less than 0.2% of mortgage transactions, in 2023, the last year for which data is available.

A simple risk-free financial transaction, however, could motivate owners to sell by allowing them to realize the value in their below-market mortgages. This is a standard practice in the Danish mortgage system; it could be done in the U.S. by creating a “defeasance” account at settlement to pay the remaining monthly payments on the existing mortgage on time and in full. Existing due-on-sale mortgage contracts prohibit this, but legislation could remove that unnecessary legal impediment and make it possible through the following process:

The federal government appoints a financial agent—the Treasury or the Department of Housing and Urban Development—to manage mortgage defeasance accounts. The defeasance manager provides the seller or settlement agent with a fair-market valuation of the remaining payments on a home’s outstanding mortgage, determined using the current market prices of a portfolio of Treasury securities. The defeasance account manager collects this market value at settlement, and invests the proceeds in the appropriate U.S. Treasury securities, generating the cash flow needed to pay off the remaining monthly payments on the existing mortgage.

The underlying real-estate collateral is replaced by the Treasury securities. The defeasance agent’s guarantee to remit the remaining mortgage payments to the mortgage servicer on time and in full substitutes for the home seller’s liability. The lender has no remaining credit risk except the U.S. government.

The defeasance transaction involves no “uncompensated taking” and doesn’t generate a financial loss for a mortgage lender. The borrower is merely exercising the option to make contractual mortgage payments until the mortgage matures, an undoubted right. The federal guarantee of full and timely mortgage payments is more than adequate to replace the original mortgage collateral—a house that could fall in value.

Inflated capital-gains tax liabilities are also depressing existing-home sales. Many longtime owners face taxes on home-price gains that exceed the exclusion limits set in 1997, $250,000 for a single filer and $500,000 for a married couple filing jointly. In the Northeast, the average sale price of a home increased from $231,400 in 1997 to $1.17 million in the second quarter of 2025, a nominal gain of $939,400 on an average-priced home. Since 1997, consumer prices and the nationwide median sales price of a home have doubled. Doubling the tax exclusions would simply adjust the exclusion values for inflation.

Homeowners locked in by ultralow mortgage rates or inflated capital-gains liability tend to belong to different generations. Younger homeowners are likely to have financial gains from home-mortgage loans originated before 2022, while taxable capital gains are likelier to keep long-tenured baby boomers from selling. Either reform by itself might lack the political support to make its implementation feasible, but together the reforms benefit several generations directly—and they have what it takes to revive the real estate market.

The Fed, Gold, and Crypto: Freedom and Competing Currencies

Published by The Mises Institute.

This article is adapted from a lecture presented at the 2025 Supporters Summit in Delray Beach, Florida.

Economic freedom should include freedom in money. It’s a freedom even, as we say these days, that advanced economies don’t have. My guiding text for this talk is Friedrich Hayek’s celebrated essay “Choice in Currency.” That is chapter 7 of this excellent book—Hayek for the 21st Century: Essays in Political Economy—that the Mises Institute has published. It’s a classic text, and I hope you’ll all take a look at it if you haven’t.

Now, freedom and money, Hayek suggests, can in concept be created through competition, through freedom of choice in money. That is to say, let the people use any money they want. Let the monies compete with each other, and the superior monies, just like in any competition, will win out. The opposite of this is, of course, a government monopoly in money, which allows the government to inflate.

The point I wish to make is that the ability to control the money is a deep and fundamental source of the power of the state. Each central bank (in our case, the Federal Reserve), of course, is part of the state and a key helper in the project of expanding and maintaining the power of the government over the people. Now, we can think about this. I know you know this already. It’s very simple, but let’s just say it again to remind ourselves. To stay in power, governments have to keep spending money. They need to give money to their friends, to give money to their supporters, to carry out their various projects, and—most expensive of all—to have wars.

In the meantime, people don’t like being taxed, so the politician is put in the position of wanting to spend without taxing. And what’s the answer? Well, you borrow. If the lenders don’t want to lend to you, you simply have a compliant central bank to print up the money that you need, and to buy your bonds, as we have observed over long periods of time now.

That way, you can keep spending. That way, you can maintain your position of power for the government.

Of course, at the same time, you’re depreciating the currency. You have inflated prices, you’ve taken away the people’s purchasing power, which is a kind of implicit taxation, and destroyed part of the value of their wages and their savings. In short, as Hayek writes, “Practically all governments of history have used the exclusive power to issue money in order to defraud and plunder the people.”

Further, Hayek says, “The politician, acting on a modified Keynesian maxim that in the long run we are all out of office”—I think that’s a wonderful line—wants “more and cheaper money,” which is “an ever-present political force which monetary authorities have never been able to resist.”

Well, is it true that the central bank can’t resist? I think it is. On one side of this argument, we had Nobel Prize–winning economist Thomas Sargent, who proposed in 1982 that we just need central banks that are legally committed to refuse the government’s demand for additional credit. In other words, just to say no to financing deficits with newly created money.

So I wish you to picture this. The Treasury has come to the central bank and said, “Here are these bonds. We want you to buy them.” Imagine the head of the central bank saying, “Well, I’ve got your request, but sorry, we’re not buying a penny of your debt with money we create. Of course, we could do it, but we won’t. So just cut your government expenses and good luck.”

I doubt that this would be a winning career move for a politically appointed chairman of the central bank, and I suspect you doubt it too. And I suspect that its probability is something close to zero, don’t you think? Moreover, in a time of war or other national emergency, the likelihood of this response is precisely zero.

So Hayek, in a very creative intellectual move, says that instead of trying to improve the behavior of the central bankers—which we’re all working on, and we ought to keep working on it—here’s something more radical. Let us simply, quoting Hayek here, “deprive governments (or their monetary authorities) of all power to protect their money against competition.”

Let them go ahead and keep printing up their paper money, just as always. Let them buy as many bonds of the government—finance as many deficits—as they want, but don’t let them have a monopoly in this money. So the money they create for deficit financing, to improve the power of the state, has to compete with some other money that will come along.

Hayek continues, “If people were free to refuse any money they distrusted”—in other words, you can’t have a legal tender law—“and to prefer money in which they had confidence,” there could be no “stronger inducement to governments to ensure the stability of their money.” So make the government compete with other monies, and as in other cases of competition, you’ll improve the quality of the product. And this idea of Hayek’s is indeed consistent with a free society.

Hayek concludes, “I hope it will not be too long before complete freedom to deal in any money one likes will be regarded as the essential mark of a free country.”

Well, that was 50 years ago and we’re not there yet. But today this thought is especially congenial to those who want private cryptocurrencies to compete with dollars, and this Hayek essay is enormously popular among advocates of cryptocurrencies, and taken as a kind of canonical text for competition in currency. It is a philosophical position consistent with their creation.

I do want to note in passing—because stablecoins have been much in the news of late, and we have the GENIUS Act, very favorable to stablecoins—that this thought does not apply to stablecoins because stablecoins are just part of the dollar system. If the dollar is depreciating, your stablecoin is depreciating, too. It doesn’t achieve the Hayekian purpose of competition in money because it’s just part of the dollar monopoly. So, it doesn’t present a competitive currency.

But Hayek, thinking about the possible competitors to the government’s fiat currency, was not really focused on other things that are themselves fiat currencies, whether they be fiat currencies issued by other governments. You could have the euro competing with the dollar, for example, or private fiat currencies such as bitcoin, which isn’t yet a currency but wishes to be.

Hayek was really thinking of gold. This is something about this celebrated essay I think is not usually properly understood. Hayek’s original speech was given in 1975. That was the year after the United States at long last lifted its oppressive 1933 law making it illegal for Americans to own any gold; that is to say, illegal to protect themselves from the depreciation of the monopoly currency of the government.

This ban on gold was an amazing act by the United States, actually, when you look back on it now. It does show how far a government will go to protect the monopoly of its own fiat currency.

So, thinking about gold in contrast to this, Hayek says, “Where I’m not sure is whether in such a competition for reliability any government-issued currency would prevail, or whether the predominant preference would not be in favor of . . . ounces of gold. It seems not unlikely that gold would ultimately re-assert its place as ‘the universal prize in all countries, in all cultures, in all ages,’ . . . if people were given complete freedom to decide what to use as their standard and general medium of exchange.”

What do you think? If we had free competition in monies, do you think that gold would win out as the preferred competitor and thereby force the governments to issue sounder currencies? An interesting thought.

As Hayek also wrote, famously and correctly, competition is a “discovery procedure.” We find out through competition things we couldn’t know otherwise, and if we had such a competition in currencies, that would give us the answer.

Now, think how much things have changed since Harry Dexter White, the chief American negotiator at the Bretton Woods Conference in 1944 and also, as you may recall, a spy for the Soviet Union, asserted that gold and the US dollar were “synonymous.”

We’ve come a long way from Harry Dexter White’s thought there.

As we know, the price of gold and dollars is over $4,000 at the present time. Just think about that relative to the par value exchange rate of dollars and gold out of Bretton Woods, which was $35 an ounce. That’s a factor roughly of 100 to 1. We didn’t quite achieve Harry Dexter White’s synonymousness of dollars and gold.

Now, it’s equally correct to think about the price of dollars in gold as it is to think about the price of gold in dollars. So, in that sense, the price of dollars is down 99% since 1971. One winner of this is the US Treasury, since the US Treasury is long gold, holding 8,000 tons, which is over 261.5 million ounces. So, the unrealized profit to the US Treasury on its gold position is basically $1 trillion.

It’s not on the books, but it’s the reality of the Treasury’s gold position. Now, this contrasts with a notable opinion piece in the Financial Times from about 20 years ago (April 16, 2004), which had the headline “Going, Going, Gold: The Pointlessness of Holding Bullion Continues to Sink In.”

“The barbarous relic, as Keynes called it, is crumbling to dust,” wrote the Financial Times. “For central banks and governments to hold [gold] is a betrayal of the public.” “Gold is on its way out,” they concluded.

Well, things change in economies, as we know. At the time that article was published, the price of gold in dollars was $400, so it’s more than 10 times that now. And at that point, central banks were, as a group, selling gold. Now central banks are buying heavily, and they’re building their positions with gold as a reserve currency. Sort of interesting. Central banks were selling at the bottom, and they’re buying at what might be the top. But that’s perhaps natural human behavior.

My brother Bruce, who lives in Switzerland, remembers that 20 years ago, when the Swiss central bank was forced to sell gold by its politicians, his friends who worked for the bank literally were crying when they were forced to sell their gold.

But today, many central banks are buying gold and increasing gold in their reserves. Can this central bank market for gold perhaps be considered an example of the free competition in currencies which Hayek envisioned?

After all, whatever the case was right after World War II, now no country can force other countries to accept the monopoly of its currency. And among central banks, there actually is choice in which currencies, including gold, to hold in their reserves. So this movement in gold is extremely interesting in and of itself. But something particularly interesting about it is that it seems to be a case of a Hayekian competition in currencies.

Now, an insightful essay by Anthony Deden suggests that when we’re looking at the gold price today, we’re not really looking at gold going up. We’re looking at the dollar going down, or fiat currencies in general declining. This strikes me as quite correct. Deden continues, “If you hold fiat money, you have a claim on the future discretion of politicians. Whereas if you hold gold, you have a claim on the future indiscretion of politicians.”

I think that’s very nice. Or you might say gold is a hedge against the state’s pursuit of power by monetary means.

We can guarantee that as long as it’s able to, through monopoly fiat currency, the state will continue to maintain and expand its power through monetary means. So the state will prevent the competition that Hayek envisioned from occurring, but it can’t prevent it in this interesting international case of central banks.

I think if we contrast the freedom-of-money case that Hayek makes—which will be hard to do in any domestic context because the state will not sit happily by and allow for competition that will reduce its power (we know that)—with the international central bank case, that sharp contrast, I think, is a major reason to study this justifiably celebrated chapter in this book. Thank you.

How far can U.S. house prices fall?

Published in Housing Finance International Journal.

U.S house prices have become bloated in America’s second house price bubble of thefirst quarter of the 21st century. These prices are now far over the peak they reached in the infamous housing bubble of the early 2000s. According to the S&P CoreLogic Case-Shiller National House Price Index, house prices in September 2025 were at a level of 327.6, compared to the first bubble’s then-monumental peak of 184.6 in 2007. In other words, they are now 77% over the previous top.

This is widely considered a housing affordability crisis, since large numbers of people, especially young families and other first-time buyers, cannot afford houses at this historically normal level of U.S. mortgage interest rates. Said Sean Dobson, CEO of the real estate company, The Amherst Group, “We’ve probably made housing unaffordable for a whole generation of Americans.”[1]

The median price of a single-family residence in 2024 was 5 times the median household income, the Harvard Joint Center for Housing Studies reported, while a historically normal level is more like 3-4 times. Amherst Group’s analysis concludes that if you keep mortgage lending rates and household income at their current levels, to reach the affordability of 2019, U.S. house prices would have to fall 35%.[2]

The “‘Affordability Crisis’ Can’t Be Solved,” a Wall Street Journal headline pessimistically suggested.[3] On the contrary, of course it can: house prices can fall. The whole point of prices is to go down as well as up. But how did they get so high to begin with?

The second extreme inflation of U.S. house prices of this still-youthful century was stoked by the massive, unprecedented and in my view, unjustifiable, buying of mortgages by the Federal Reserve. The Fed purchased mortgage assets for the first time in its history in 2008, as an emergency intervention while the first bubble was collapsing. The Fed promised Congress, and genuinely intended, that such buying would be temporary, would be reversed, and would not affect the longer-run size of its balance sheet.

But instead, the Fed’s mortgage expansion continued until 2022 – for fourteen years. Along the way, it forced 30-year fixed mortgage interest rates to abnormally low and unsustainable levels of below 3%. The Fed’s mortgage portfolio, an asset it had never historically owned, reached the staggering level of $2.7 trillion, three times as big as the whole Fed had been in 2007, as the Federal Reserve turned its balance sheet into the equivalent of the world’s biggest savings and loan. As of November 2025, this portfolio is still huge at $2.1 trillion, with a mark-to-market loss of $323 billion as of the last report on September 30. Its former promises to the Congress of reversing the investment notwithstanding, the Fed cannot sell its huge mortgage portfolio without realizing massive market value losses and pushing mortgage interest rates higher.

When the Fed stopped increasing the size of its mortgage portfolio in 2022, U.S. mortgage interest rates quickly rose to historically common levels of 6%-7%. Many observers, including me, were surprised that this doubling of the interest cost of a house purchase did not cause a sustained, significant fall in average house prices, but national indices of house prices continued an upward trend. However, the volume of house purchases shrank dramatically, to the lowest levels in three decades. The increasing prices were thus on a much reduced volume of transactions.

The rate at which prices were rising slowed steadily in 2024 and 2025. The AEI Housing Center projects November 2025 at a 0.7% year-over-year national house price increase, expecting it to fall in December to zero for the full year 2025. The Center comments, “This will mark the first time since 2011 that December year-over-year house price appreciation has been at about zero.”

Since U.S. inflation is running at 3%, if nominal house prices are flat, in real terms they are falling at a rate of 3%.

The Housing Policy Council, using data from the Federal Housing Finance Agency, has calculated the deviation of U.S. house prices from their long-term, inflation-adjusted trend line. As of the third quarter of 2025, it concludes that house prices were 30.8% over their long-term trend. This is similar to the first quarter of 2007, at the top of the first 21st century bubble, when they were 29.5% over the trend. In that bubble, what happened next was that U.S house prices fell until 2012 by a total of 27% in nominal terms.

In this context, let us consider some cities where mid-tier house prices have already fallen by 15% to 25% from their most recent peak (which was usually in 2022), while the national index was still rising. Wolf Richter has helpfully listed these for us, using data on mid-tier houses from the Zillow Home Value Index:

Oakland, California -25%

Austin, Texas -24%

New Orleans, Louisiana -19%

Lee County, Florida -16%

Manhattan, New York -16%

Sarasota County, Florida -16%

San Francisco, California -15%[4]

Although these are large percentage declines, they are from extreme peaks and leave prices still at high levels. Taking the top two on this list, for example, house prices in Oakland after a 25% fall are still more than 40% over their first bubble peak. In Austin, after falling 24%, they are still more than double their level in first bubble times. This seems to leave room for further declines.

On the cause of the second bubble, consistent with my discussion above, Richter writes, “The below-5% average 30-year fixed mortgage rates were an aberration caused by an explicit policy by the Federal Reserve to repress mortgage rates to trigger the biggest bout of home price inflation this country has ever seen.”

As to what can now be done about the unaffordability of houses, he reaches this sensible conclusion: “The solution of the affordability crisis is many years of rising wages and falling house prices that over time would unwind the crazy home price explosion.”[5]

Where do U.S. house prices go from here? In my view, it seems unavoidably down. But by how much? I don’t know and neither does anybody else. The AEI Housing Center has a preliminary projection of down 1% for 2026, but that would not correct much of a 30% overshoot from trend. The Center adds that risks are to the downside, as they surely are.

Without venturing a numerical guess, I do observe that financial history demonstrates that asset prices after a bubble can go down more than most people, who consider only recent experience, consider possible. The lessons of longer history are that the answer to the question, “How much can asset prices fall?” is liable to be “More than you think.”

1 “The Price of Economic Firefighting,” Fortune, November 15, 2025.

2 Ibid.

3 Wall Street Journal print edition, November 24, 2025, p A2.

4 “The 14 Bigger Cities and Counties with the Biggest Price Declines,” Wolf Street, November 23, 2025.

5 “Mortgage Rates Are Not Too High. What’s Too High Are Home Prices,” Wolf Street, November 29, 2025.

Federal Reserve’s Independence Emerges as Culprit in the ‘Unaffordability’ of Housing

Home prices are now 77 percent above their peak in the housing bubble of the early 2000s.

Published in The New York Sun.

America appears to be at the top of its second house price bubble of the first quarter of the 21st century. House prices are now 77 percent above their 2007 peak in the housing bubble of the early 2000s, according to the S&P CoreLogic Case-Shiller National House Price Index.

This second inflation of American house prices in the still-youthful century was stoked by the unprecedented and unjustifiable buying of mortgages by the Federal Reserve. The central bank purchased mortgage assets for the first time in its history in 2008, as an emergency intervention while the first bubble was collapsing.

The Fed assured Congress that such buying would be temporary, would be reversed, and would not affect the longer-run size of its balance sheet. Instead, the Fed’s mortgage expansion continued until 2022 — for 14 years. Along the way, it forced 30-year fixed mortgage interest rates to abnormally low and unsustainable levels of below 3 percent.

The Fed’s mortgage portfolio, an asset it historically had never owned, reached the staggering level of $2.7 trillion. This was three times as big as the whole Fed had been in 2007, as the Federal Reserve turned its balance sheet into the equivalent of the world’s biggest savings and loan.

As of December 2025, the mortgage portfolio is still huge at over $2 trillion; it had a remarkable mark-to-market loss of $323 billion as of the last report on September 30. The Fed’s former promises to the Congress of reversing the investment notwithstanding, the Fed cannot sell its huge mortgage portfolio without realizing market value losses and pushing mortgage interest rates higher.

The current bubble is widely considered a housing affordability crisis, since large numbers of people, especially young families and other first-time buyers, cannot afford houses at the now historically normal level of U.S. mortgage interest rates. “We’ve probably made housing unaffordable for a whole generation of Americans,” said the chief executive, Sean Dobson, of a real estate company, the Amherst Group.

Amherst Group’s analysis finds that if we keep mortgage lending rates and household income at their current levels, to reach the affordability of 2019, U.S. house prices would have to fall 35 percent. The “‘Affordability Crisis’ Can’t Be Solved,” a Wall Street Journal headline proclaimed. On the contrary, though, it can: House prices can fall. The whole point of prices is that they can go down as well as up.

When the Fed stopped increasing the size of its mortgage portfolio in 2022, United States mortgage interest rates quickly rose to historically common levels of between 6 percent and 7 percent. Many observers, including me, were surprised that this doubling of the interest cost of buying a house did not cause a sustained, significant fall in average house prices but national house price indices continued an upward trend.

However, the volume of house purchases shrank dramatically, to the lowest levels in three decades. So the increasing prices were on a much reduced volume of transactions. The rate at which house prices were rising has slowed steadily in 2025. Now the AEI Housing Center projects the year-over-year national house price increase to fall to zero in December for the full year 2025.

Since U.S. inflation is running at 3 percent, if nominal house prices are flat, in real terms they are declining at a rate of 3 percent. The Housing Policy Council has calculated the deviation of U.S. house prices from their long-term, inflation-adjusted trend line. As of the third quarter of 2025, it concludes, house prices were 30.8 percent higher than their long-term trend.

This is similar to the first quarter of 2007, at the top of the first 21st century bubble, when house prices were 29.5 percent higher than the trend. What happened next, that time, was that American house prices fell by a total of 27 percent, dropping until 2012. Where do home prices go this time? It seems to me that the direction is unavoidably down. By how much? I don’t know and neither does anybody else.

The repeated housing bubble shows yet again what a bad idea is Federal Reserve “independence.” Who approved the Fed’s plunge into mortgages which inflated a new bubble? Who approved the consequent risk to the Fed’s own finances, which resulted in tens of billions of losses to the Fed, the Treasury, and the taxpayers?

No one. No part of the government, especially one with the power to make such costly mistakes, should ever operate as a law unto itself. It is high time for this to be made clear by the Congress, which is the creator and overseer of the Federal Reserve.

What Does the Fed Mean To You?

Hosted by the Mises Institute.

Mises Senior Fellow Alex J. Pollock explains how the post-1971 “Nixonian” paper-money world makes the Fed both the engine of inflation and a prop for an oversized state, urging students to see central banking as the hidden arsonist behind booms, busts, and the erosion of their future purchasing power.

Recorded at Cornerstone University in Grand Rapids, Michigan, on November 1, 2025.

Why stablecoin failures could happen again

Published in the Financial Times.

“If stablecoins are not that stable,” governor Olaf Sleijpen of the Dutch central bank warns you end up in a situation where the underlying assets need to be sold quickly, which creates financial stability risks (Interview, November 19). Meanwhile the Nobel laureate economist Jean Tirole says it could result in government bailouts (Interview, September 2).

However this is not really a question of “if”, since stablecoins have already had a government bailout in the US.

Circle’s USD stablecoin held more than $3bn in uninsured, at-risk deposits as “reserves” in the failed Silicon Valley Bank. It should have suffered huge and well-deserved losses on this investment but instead it was egregiously bailed out, along with other crypto and venture capital barons, by the US government. The authorities shifted the losses from the wealthy depositors to the Federal Deposit Insurance Corporation, based on an emergency “systemic risk” declaration.

Could this happen again? Absolutely. The root and continuing problem is that stablecoin issuers are not limited to holding short-term Treasury bills, as is often erroneously claimed, but in reality are empowered to invest in at-risk deposits in both domestic and foreign (from the US viewpoint) banks. The so-called Genius Act regulating stablecoins explicitly provides for this.

Are large, uninsured deposits risky? Of course they are. More than 3,000 US-insured depository institutions have failed since 1980, and many more would have failed if not for recurring government bailout programmes, most recently in 2023. The inclusion of non-US banks adds extra risk, because, in addition to their potential failure, their dollar-denominated deposits are foreign currency liabilities to them, and ultimately depend on the Federal Reserve’s willingness to lend dollars to their own central banks.

The Genius Act thus deeply entangles stablecoin and banking risk, and just as happened in the Silicon Valley Bank case, can transmit banking crises into stablecoin crises: a systemic stability problem indeed.