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.
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.
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.
Austrian school of economics
Published in Wikipedia.
They also argue that cryptocurrency and Bitcoin serve as a "Hayekian escape", a method that people can use to escape the government's currency monopoly, particularly during periods of hyperinflation.[93]
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93 Pollock, Alex J. (2022-03-30). "Are Cryptocurrencies the Great Hayekian Escape? – Alex J. Pollock". Law & Liberty. Retrieved 2025-10-23."
Does the Fed have an ethics problem?
Published in American Banker.
Expert Quote: "When you're in a position that's as influential as working at the Federal Reserve, you're governed by the law of Caesar's wife — be above suspicion." — Alex Pollock, senior fellow at the Mises Institute.
What Have the Inflation-Mongers Wrought?
Our still-young 21st century has already had two bubbles in United States house prices.
Published in The New York Sun.
Is the Federal Reserve an “inflation-monger,” as monetary economist Brendan Brown labels it in his new book, “Bad Money”? Of course it is. The Fed has stuck us with a constant depreciation of the purchasing power of the dollar. With its “inflation targeting” regime beginning in 2012, it promises to continue to depreciate the dollar forever, inflation without end.
Fed representatives have now been known to opine that inflation is too low and they should get it up. That is a radical departure from their forebears. William McChesney Martin, chairman of the Fed between 1951 and 1970, considered inflation “a thief in the night.” Alan Greenspan, the chairman between 1987 and 2006, said that he thought the ideal inflation rate was “zero, properly measured.”
The Fed’s actions have not lived up to its words in this respect, but from Chairman Ben Bernanke on, the Fed has forsaken even the words and changed its tune to inflation-promising. At the same time, the Fed constantly plays the refrain that it must be “independent.”
It is, of course, nonsense to think that any part of a constitutional republic can be a separate and autonomous power, a law unto itself, or a band of platonic philosopher-kings.
If one believed, however, that the Fed truly stood for sound money and would control the inflationist urges of presidents and other politicians, you might feel a twinge of temptation toward the independence line. Yet since the Fed itself is inflationist, its “independence” has no appeal at all, on top of being constitutionally wrong.
The logic of Mr. Brown’s argument should be widely understood. Here it is, in summary:
Good Money displays stable purchasing power and reliable value on average over time. Bad Money always depreciates in value and has shrinking purchasing power, as the government and its central bank impose inflation on the people.
Individual prices must go up and down to fulfil their essential role in resource allocation. But inevitably the overall tendency of prices will sometimes rise, especially when there are wars or other crises which get financed by monetary expansion.
Because prices will sometimes rise, in order for prices to be stable on average over time, at some other times prices must fall. Stated alternately: If prices don’t fall sometimes, you can’t have stable prices.
Yet should overall prices ever be allowed to fall? That is what the inflation-mongers want precisely to prevent. They wish to reinflate any periodic tendency for prices to fall. Under this doctrine, every time prices go up, they create a permanently higher level, and then continue inflating from there.
The inflation-mongers always emphasize changes in the rate at which prices are rising, not the ever-higher level of prices that is so obvious to ordinary consumers. When the rate of increase in prices is 3 percent instead of 4 percent, they can announce that “inflation is down.”
Yet “inflation is down” entails “prices are up.” At 3 percent inflation over an 80-year lifetime, prices will multiply by a factor of more than 10. A dollar will become nine cents, but we would be told that “inflation is stable.”
Inflation-mongers suffer from the fear of any fall in average prices, or “deflation phobia.” This probably arises from memories of the 1930s, but a knowledge of longer economic history gives a wider view.
While a debt deflation in the wake of a collapsed bubble is indeed bad deflation, periods of major innovation and increasing productivity in a competitive economy naturally cause prices to fall, thereby improving the standard of living. This is good deflation.
There are three kinds of inflation: Monetary inflation by the central bank; inflation of goods and services prices; and inflation of asset prices. If the economy is benefitting from good deflation resulting from innovation and productivity, but the inflation-mongers offset this by monetary inflation, the resulting inflation rate in goods and services may still look acceptable, but is greater than it looks.
If it has been moved, say, to +2 percent in goods and services from a natural -1 percent, the move has actually been 3 percent. The monetary inflation would likely also flow into asset price inflation and recurring asset price bubbles.
Our still-young 21st century has already had two bubbles in United States house prices. Both reflected among their key causes artificially low interest rates from Federal Reserve monetary inflation, which stoked artificially high house prices.
The first housing bubble ended in a terrific collapse, the second has caused a crisis of unaffordability and now appears to be topping out far over the peak of the first. This the inflation-mongers have wrought.
Even 2% Inflation Is Too Much
Published in The Wall Street Journal.
As you suggest in “Getting Used to 3% Inflation” (Review & Outlook, Oct. 25), 3% is a lot of inflation, much worse than 2%, which is already too high. At a sustained 2%, which the Federal Reserve promises, average prices will nearly quintuple in 80 years, and the dollar will shrink to a value of 20 cents. At 3%, it’s worse: Average prices will multiply more than 10 times, and the dollar will reduce to 9 cents. Neither satisfies the goal of “stable prices” assigned by the Federal Reserve Act. As the great Paul Volcker wrote in his autobiography, “The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation.”
Alex J. Pollock
Mises Institute
Lake Forest, Ill.
Banking Risk & Stablecoins, with Alex Pollock
Hosted by infineo.
Alex Pollock has decades of experience in banking operations and regulation, including serving as the CEO of the Federal Home Loan Bank of Chicago and a director of research position at the US Treasury. He joins Bob to discuss the GENIUS Act and the potential risks that banks pose to stablecoin issuers.