What Currency Would Americans Choose?

In which our columnist questions his readers.

Published in The New York Sun.

In the spirit of the Declaration of Independence, let us ask whether the rights to “life, liberty and the pursuit of happiness” should include the right to use the money of your and your counterparties’ own choice. Or should you be forced to use the paper dollars which the Federal Reserve prints?

Under present circumstances one is forced to use what we call Federal Reserve Notes, because the government grants a complete monopoly in money to the Fed. We are so accustomed to this situation that we are likely to take it for granted. Yet it is not necessary that the Fed have the power to print as much money as it wants to print.

Or to lend as much as it wants to the government to spend. Or to create perpetual inflation, impose a constant inflation tax on the people without any approval by the Congress, and constantly depreciate the money, savings, and wages to finance the government’s deficits.

The philosopher-economist, Friedrich Hayek, put the question in his “Choice in Currency: A Way to Stop Inflation.” That was issued in 1976, two years after Hayek won the Nobel Prize in Economics. “Why,” Hayek asked, “should we not let people choose freely what money they want to use?” He understood that the Treasury and the Fed would hate this question, but a free people ought to take it up.

Hayek suggested that the key problem is not that the Federal Reserve gets to issue money, but that it gets a monopoly in doing so. He proposed that this monopoly be taken away, so that the Fed could still issue money, but the money it creates would have to compete with other money for the public’s confidence.

In Hayek’s proposed world, central banks would be disciplined by this competition in currency. “There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence.” Have governments abused their money power? Without doubt.

Hayek warned that nearly all governments “used their exclusive power to issue money in order to defraud and plunder the people.” His thoughts are congenial to those who want cryptocurrencies to compete with Federal Reserve notes. In 2025, Congress enacted with bipartisan majorities the “Genius Act,” favorable to the cryptocurrency called stablecoins.

It would be newsworthy if stablecoins were an example of Hayekian choice in currency, but unfortunately, they are not. Because stablecoins are tied one-for-one by definition and now by law to Federal Reserve dollars, when the Fed is depreciating your paper dollars, it is equally depreciating your stablecoins.

However, there have been historical examples of true parallel currencies in America. The most pertinent case was during the Civil War, when as described by Joseph Salerno of the Mises Institute, pure paper Treasury greenbacks “swiftly became the domestic currency… but gold continued as a parallel currency in the East, because of its use in foreign trade.”

This precedent is consistent with Hayek’s proposal to create competition for central bank paper currencies, because Hayek was really thinking about gold. That the best monetary competition would come from gold is something about Hayek’s essay often not understood.

When the essay was published in 1976, it had been only two years since the United States government had at long last rescinded its oppressive 1933 law making it a criminal offense to own any gold to protect yourself against government monetary depreciation. This is a good example of the warning of Psalm 146: “Do not put your trust in princes” — or, Hayek would add, central banks.

Wrote Hayek, “Where I’m not sure is whether in such a competition for reliability any government-issued currency would prevail, or whether the preference would not be in favor of some such units as ounces of gold. It seems not unlikely that gold would ultimately re-assert its place… if people were given complete freedom to decide what to use as their standard.”

So I turn to my readers. Had they the freedom to choose the money they really wanted, what would it be? Would it be gold, or the Fed’s inflationist paper currency, or a cryptocurrency, or something else? Do they, like Hayek, think gold would win in a free competition?

The Map and the Bubble: A Review of Alan Greenspan’s ‘The Map and the Territory’

Originally published December, 2013.

The so-called “Great Moderation,” for which our fiat-currency central bankers gave themselves so much credit, turned out to be the Era of Great Bubbles.  The U.S., in successive decades, had the Tech Stock Bubble and then the disastrous Housing Bubble. Other countries had real estate and government debt bubbles.

Presiding over the Era of Great Bubbles as Chairman of the world’s principal central bank from 1987 to 2006, was Alan Greenspan, a man of undoubted high intelligence and great talent with scores of subordinate Ph.D. economists to build models for him.  He was then world famous as “The Maestro,” for supposedly being able to always orchestrate the macro economy to happy outcomes. The idea that anybody, no matter how talented, could really be such a Maestro is ridiculous, just as the idea that national house prices could never fall was ridiculous—but both were widely believed and expressed nonetheless. 

The central bankers, working diligently for their concept of economic Moderation, presided over the Era of Great Bubbles. Is this coincidence? Or does the one cause the other?

Greenspan, in his highly interesting new book, The Map and the Territory (2013), muses: 

The near quarter century from 1983 to 2007 was a period of very shallow recessions and seemingly extraordinary stability [aka “The Great Moderation”].  But protracted economic stability is precisely the tinder that ignites bubbles;1 

and further: “Central banks have increasingly been confronted by the prospect that their success in achieving stable prices has laid the groundwork for asset price bubbles.”2

Let us begin by pointing out that the first part of the period Greenspan cites was not notable for financial stability.  In the 1980s, the savings and loan industry infamously collapsed, taking its government deposit insurer (the Federal Savings and Loan Insurance Corporation) with it into irreparable insolvency.  For the ten years from 1983 to 1992, 660 savings and loans failed. So did 256 savings banks, and so did 1,321 commercial banks.  In all, this decade brought the failure of an appalling 2,237 U.S. financial institutions, an average of 223 per year for ten years.  Oil and farmland bubbles collapsed in the 1980s, the government-sponsored Farm Credit Banks needed a bailout, numerous foreign governments defaulted on their debt to U.S. banks, and the early 1990s featured a massive commercial real estate bust.

All of the 1980s disasters represent the aftermath of the Great Inflation of the 1970s, when annual inflation rates got to double digit increases.  This inflation was created by the Federal Reserve itself and its money printing exertions in the crises of those days.  Greenspan provides a notable contemporary quote:  “America is in the worst economic emergency since the Great Depression”—the date? 1975.3

In the next decade, with some success and by imposing a lot of pain, the Fed undertook “fighting inflation”—the inflation it had itself caused. Presumably the Fed learned from this experience.  So in the 2000s it performed a variation: the Fed first stoked the asset price inflation of the Great Housing Bubble and then worked to bail out the Bubble’s inevitable collapse.

To evaluate the Fed accurately, we have to confront how the Fed relates to bubbles not only through “economic stability,” as Greenspan suggests (although that does indeed play an important psychological role in bubbles), but through its money printing and financial market manipulations.  These can and do bring about asset price inflations. 

Sometimes this is intentional on the part of the Fed, when it is trying to bring about “wealth effects,” as it did with the housing boom in 2001-2004 and is now doing again with of so-called “quantitative easing,” including its $1.5 trillion mortgage market manipulation. Exaggerated asset inflations always end badly, needless to say, but those highly leveraged with debt are the worst. This is why, as Greenspan correctly says, the Housing Bubble was so much more destructive than the Tech Stock Bubble.

Fiat-currency central banks like the modern Fed are, among other things, in the business of money illusion—that is, trying to influence real resource costs and prices by depreciating the currency they issue at more rapid or less rapid rates.  The business of money illusion often turns into the business of wealth illusion: bubbles create illusory “wealth” that will evaporate.

In footnote 3 to his Introduction, Greenspan importantly observes, “I believe asset price causation is underrepresented in most models”4—he means macroeconomic forecasting models. He recognizes two problems here: the shortcoming of macroeconomic forecasting models, and the difficulty of knowing when asset price inflations become bubbles.

For example, “The model constructed by the Federal Reserve staff [recall those scores of economists], combining the elements of Keynesianism, monetarism, and other more recent contributions to economic theory, seemed particularly impressive.” But: “The Federal Reserve Board’s highly sophisticated forecasting system did not foresee a recession until the crisis hit.  Nor did the model developed by the prestigious International Monetary Fund.”5

With admirable candor, Greenspan relates that at the onset of the financial crisis in August, 2007, “I was stunned.”6

In short, “leading up to the almost universally unanticipated crisis of September 2008, macromodeling unequivocally failed when it was needed most, much to the chagrin of the economics profession.”7

Why did the models which seemed so impressive perform like Casey at the Bat?

For one thing, “models, by their nature are vast simplifications.”8 True even for extremely complex models.  Moreover, they do not deal so well with discontinuities, like the shriveling of prices in the collapse of bubbles and panics.  And: “a related obstacle for forecasting and policy setting,” Greenspan reflects, “is that we seek to identify in advance which assets or markets could turn toxic and precipitate a crisis.  It was not apparent in the early 2000s, as many commentators retroactively assume, that subprime securities were headed toward being the toxic asset they turned out to be.”9

This is fair. The senior-subordinated structures and techniques used to design these securities were viewed as a major financial innovation and a creative advance, which in fact they were.  But innovations, which are the creators of long-term growth, also create uncertainty and surprises, good and bad. 

Greenspan quotes the famous dictum of Joseph Schumpeter that economic growth depends on “creative destruction.”10  This is his only citation of Schumpeter, but he might have quoted that illustrious economic thinker at greater length to illuminate the problems of why models, sophisticated or simple, may fail at the most important times.  For example, Schumpeter wrote (in 1946):

 “The essential points about creative response are these…From the standpoint of the observer who is in full possession of all relevant facts”—say by hypothesis a Federal Reserve Chairman—“it can always be understood ex post; but can practically never be understood ex ante, that is to say, it cannot be predicted…. No deterministic credo avails against this.”11

Schumpeter considered “innovation, being discontinuous.”  He sharply contrasted “the concept of equilibrium, the continuous curves and small marginal variations…the circuit flow of economic routine”—easier to model-- with a real “theory of capitalist change,” which requires “the type and function of the entrepreneur, which will…destroy any equilibrium that may have established itself,” producing “cyclical waves which are essentially the form progress takes.”12 This applies to financial, as well as industrial and commercial, entrepreneurs.

Dipping into some classic financial wisdom, Greenspan considers “the ephemeral nature of market liquidity,”13 and the human “propensities related to fear [and] euphoria.” When mass euphoria turns to panicked fear, market liquidity vanishes.  He considers the propensity for “herding.”  Here we should especially add the dangerous propensity for cognitive herding, which affects the thinking and expectations of all kinds of actors in a financial bubble, central bankers and regulators, as well as investors, bankers and borrowers.  Then there is “optimism” which “encourages entrepreneurial initiatives” and “probably assures greater successes, but certainly more failures as well.”14  And not to be forgotten is the famous Greenspan phrase, “irrational exuberance.”

The collective optimism which helps induce bubbles tends to flourish during periods of prosperity, success and stability, as in the Greenspan quote above: “the tinder that ignites bubbles.”  This thought echoes Hyman Minsky, the theorist of the endogenous build-up of “financial fragility,” whose work has been summarized as “Stability creates instability.”  In slightly longer form, the logic is: stability creates optimism, optimism creates speculative debt, and speculative debt ultimately creates instability. However, Minsky’s insightful work on financial psychology and cycles is not mentioned in this book.

Neither is Frank Knight’s famous distinction between risk and uncertainty, although it seems highly relevant to the conundrums of economic forecasting and central banking. It will be recalled that in his famous 1921 book, Risk, Uncertainty and Profit, Knight proposed that the unknowable future is characterized not only by risk, but more importantly, by uncertainty.  With risk in Knight’s sense, you cannot know the outcome, but you do know the odds—like rolling fair dice or flipping a fair coin. But with uncertainty, you cannot even know what the odds are, so your ignorance of the future is more radical.  Knight thought that the essential function of the entrepreneur, and the source of all economic profit, was bearing uncertainty. In other words, uncertainty is at the heart of economic growth.   In contrast, many financial models which failed in the mortgage bubble thought their essential function was to deal only with risk, that they knew the odds—needless to say, they didn’t. 

Greenspan reasonably observes that “Having been mugged too often by reality, we forecasters appropriately express less confidence.”  Considering “the vagaries of human nature, forecasting will always be somewhat of a coin toss”—to quibble about the metaphor, it would be better to have something expressing uncertainty, rather than risk, here.  But we get the point.  “Euphoria will always periodically produce extended bull markets that feed off herd behavior [and herd thinking], followed by rapid fear-induced deflation of the consequent bubbles.”15

In his concluding chapter, Greenspan poses a profound question.  The enterprising market economy is “the most effective form of economic organization ever devised,” with the “remarkable gains in material well-being and life expectancy” which are obvious to all.  Then the “but”: “But at its core is creative destruction.” (16) Can the amazing record of economic progress happen without accompanying booms and busts?  Or are booms and busts  inevitably entwined in the energies which create the progress?

Greenspan’s thoughtful answer:  “I see no way of removing periodic irrational exuberances without at the same time significantly diminishing the average rate of economic growth and standards of living.” For “rising standards of living require innovators who have unlimited expectation of success and perseverance no matter how many times they fail….  Exuberance (the propensity for optimism) is required—even if at times it runs to excess.”16

All of us should ponder this, as well as pondering a further essential question which Greenspan, in spite of the many provocative ideas this book discusses, does not address.  Do the constant efforts of central banks to promote moderation and stability, by money printing and interest rate manipulation, all the while facing ineluctable uncertainty, and using models which fail when most needed, result in making the booms and busts better or worse?

Originally published December, 2013. Republished with permission of the author.

---

1. p. 53

2. Ibid.

3. p. 133

4. p. 345

5. p. 7

6. p.37.

7. p. 7.

8. p. 5.

9. p. 51.

10. p. 93.

11. Joseph Schumpeter, The Economics and Sociology of Capitalism (1991), pp. 411-412

12. Schumpeter, Essays on Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism (1951), pp. 67, 69.

13. p. 92.

14. pp. 6, 32.

15. pp. 292-293.

16. pp. 299-300.

The Crisis at the Fed That No One Talks About

It’s staring the new chairman of the central bank squarely in the face.

Published in The New York Sun.

Of all the issues facing the Federal Reserve’s new chairman, Kevin Warsh, one that gets little public attention is the financial condition of the Fed itself. In addition to its much-publicized roles of setting short-term interest rates, which may be headed back up, and creating inflation, which is already too high, the Fed is a giant financial enterprise. It has total assets of $6.9 trillion as of March 31 combined with negative real capital.

The Fed has lost hundreds of billions of dollars due to its huge interest rate risk position. This costly risk was established under the then-chairman, Ben Bernanke, who assured Congress it would be temporary. It wasn’t. It was continued under the regimes of Janet Yellen and Jerome Powell and remains embedded in the Fed’s balance sheet today, almost 18 years after Mr. Bernanke’s original gamble.

It’s waiting for Chairman Warsh. The interest rate risk position is fundamentally simple. It consists of making long-term, fixed rate investments financed by floating rate funding: invest long, borrow short. It closely resembles the risk of a typical 1980s savings and loan. Because it took this risk, the Fed reported large net losses for the three calendar years 2023, 2024, and 2025, with the losses totaling the egregious sum of $211 billion.

This is more than four times the Fed’s total book capital of $46 billion, which means that its capital is gone, even though the Fed refuses to show any reduction in the capital on its financial statements. The Fed argues that it can on its own decide on a special accounting treatment for itself, different from everybody else, which it would never allow its regulated banks to follow.

In addition to the annual operating losses, the Fed has suffered as of March 31 mark-to-market losses of $857 billion. The Treasury securities the Fed owns are worth on the market $546 billion less than it paid for them. Its mortgage-backed securities are worth $311 billion less than it paid. The operating losses and mark-to-market losses together add up to more than $1 trillion and are 23 times the Fed’s reported book capital.

The Fed has often claimed that no one should worry about its enormous losses, because it wasn’t set up to be a “profit maximizer.” However, the Fed most certainly was set up to make profits for the government. It forks over almost all its profits, which it always has had historically, to the Treasury. When it makes losses instead, payments don’t go to the Treasury, so the federal deficit and the national debt grow correspondingly bigger. The Fed’s losses are the Treasury’s and taxpayers’ losses.

The owners of the Fed’s stock should also care about its losses. All $39.7 billion of the Fed’s paid-in capital is owned by private banks. Under a little-known provision of the Federal Reserve Act, they are liable to be assessed up to twice their investment in the stock to offset losses. This is disclosed in the Fed’s financial statements, although pretty well buried down in the footnotes.

The Fed could reduce its interest rate risk by selling some of its long-term Treasury securities and mortgage-backed securities. If it did, though, the mark-to-market losses would become permanent cash losses. The Fed could no longer claim they were only “paper losses.” On top of that, serious Fed selling would push long-term Treasury and mortgage interest rates higher: Not a political winner.

In the first quarter of 2026, the Fed reported a modest profit of $1.4 billion. Does this mean its profitability and interest rate risk problems are over? It doesn’t. My estimate is that the Fed has — on a net basis — about $2.5 trillion in long-term assets funded short. The bond market is now expecting short-term interest rates to rise again this year. If they do, it would cost the Fed $25 billion or so per year for a 1 percent rise in rates.

Moreover, the profit the Fed reported for the first quarter was only possible because the Fed is being heavily subsidized by the Treasury. To do this, the Treasury holds huge interest-free deposits at the Fed — $893 billion of them on March 31. At current interest rates, these give the Fed an additional profit of $33 billion per year, while increasing the Treasury’s deficit for the year and increasing the national debt by the same $33 billion.

Why doesn’t the Fed pay the Treasury, and thus the taxpayers, the same interest rate on deposits that it pays the private banks? Obviously, it should, and Congress needs to fix this. When we subtract the Treasury’s generous subsidy, the central bank is still running a significant loss, which will grow larger if short-term interest rates rise again.

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.

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.

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.

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.

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 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.

Hayek’s Last Hurrah, So To Speak: A Choice in Currency Emerges Among Central Banks

Many are scrambling to purchase the precious metal as the gold value of the greenback plunges to new lows.

Published in The New York Sun.

Since 1971, in the Nixonian monetary era, the American government has enjoyed a power derived from the pure fiat paper money that its central bank can print in unlimited quantities to finance the government’s deficits. Simply put, politicians naturally like to keep passing out money to stay in office. It’s convenient, politicians reckon, to have a compliant central bank to buy government bonds with printed money — especially if the Congress is spending more than taxes bring in.

Of course, this scheme depreciates the currency, taking away the people’s purchasing power and the value of their savings and wages. As Friedrich Hayek observed in his essay “Choice in Currency,” “Practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.”

Hayek argued that the essential problem is that the government’s central bank has an “exclusive power” to print money, or in other words, a monopoly on money, so it can impose its depreciating currency on the people. He suggested that since there is no hope of reforming the central bank, instead we should focus on taking away its monopoly. Thus:

“Let us deprive governments [and] their monetary authorities of all power to protect their money against competition.” Then “if people were free to refuse any money they distrusted and to prefer money in which they had confidence, [there] could be no stronger inducement to governments to ensure the stability of their money.”

In other words, let choice in currency and competition among currencies discipline the government and its central bank. If they produce an inferior money, that money would lose out to the better one supplied by someone else. This was an innovative application of classic market logic to the problem of money, one notably consistent with a free society.

Hayek concluded, “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.” A recent introduction to Hayek’s thought observes that this essay “is enormously popular among advocates of cryptocurrencies.”

Hayek, in any event, was not most concerned with competition for the government’s fiat currency by other fiat currencies, whether those of other governments or private currencies. He was really thinking of gold. “It seems not unlikely,” he suggested, “that gold would ultimately reassert its place as the universal prize if people were given complete freedom to decide.”

Hayek’s essay originated shortly after the American government at long last lifted its oppressive 1933 prohibition of Americans owning any gold, which it had made into a criminal offense. All Americans were prohibited by their government from protecting themselves with gold from the ongoing depreciation of their currency by the Federal Reserve.

That may seem amazing to us now, but it clearly shows how far even a democratic government will go to protect the monopoly of its own fiat currency. The chief American negotiator at the 1944 Bretton Woods Conference, Harry Dexter White, claimed that for international use, “the United States dollar and gold are synonymous,” as Benn Steil reports in “The Battle of Bretton Woods.” We are a long way from there.

With the value of a thousand American dollars currently at about one-quarter of an ounce of gold, as compared to the old Bretton Woods price of 28.6 ounces, the value of the dollar has depreciated by 99 percent against gold. White’s view did not hold up, and neither did the confident assertions of this Financial Times editorial from 2004:

“The barbarous relic is crumbling to dust,” the FT’s editors wrote. “For central banks and governments to hold it as a reserve asset is a betrayal of the public. Given the pointlessness of holding gold, gold is on its way out as an investment and as a reserve asset.”

Today, in contrast, many central banks are buying gold and increasing the allocation to gold in their reserves, and the unrealized profit of the U.S. Treasury on its gold has reached about $1 trillion. The Fed, meanwhile, owns no gold, and adding together its operating and mark to market losses has a total loss of around $1 trillion.

The international market for central bank reserves cannot be monopolized like a domestic currency can. Perhaps in this central bank market we are now seeing Hayek’s scenario of choice and competition in currencies actually playing out. Gold seems to be winning this round.

The Reign of the Greenback

Published by the Civitas Institute.

The biggest challenge to the dollar's global stature is the American government's unsustainable debt.

In his provocative, erudite yet lively and enjoyable tour of the global monetary system, Our Dollar, Your Problem, Kenneth Rogoff tells us that there are more than 150 currencies in today’s world, but, of course, there is only one top, overwhelmingly dominant currency – the U.S. dollar. The dollar maintains its global dominance even though, for 54 years and counting, it has been and remains a pure paper currency, a “greenback,” which is not convertible at a par value into any precious metal, only another engraved piece of paper or an accounting entry on some bank’s books. Moreover, it suffers from endemic consumer price inflation and recurring asset price inflation.

Nonetheless, “the greenback rules the world today like no currency before it,” Rogoff observes. It surpasses “even the British pound sterling at its peak from the end of the Napoleonic Wars through World War I, when the sun never set on the British Empire,” and when, for 90 percent of those years, pounds were reliably convertible into gold coins.

In 1971, the United States, under President Nixon, defaulted on its Bretton-Woods commitment to redeem dollars held by foreign governments for gold. It thereby echoed the default on the Treasury’s gold bonds under President Roosevelt in the 1930s.

Rogoff gives us this counsel: “Let’s get one thing straight: It is simply not true that all U.S. government debt is “safe”— certainly not in real terms.” Of course, he is right. He continues, “policy studies and journal papers almost ubiquitously came to refer to U.S. government obligations as “safe” debt. This lazy language drives some of us crazy.” Including me. But this lazy language is handy marketing U.S. government debt across the country and around the world, and it really means “safer” relative to other competing currencies.

The anger of European governments at the 1971 U.S. default provided the occasion for then-Secretary of the Treasury John Connally’s memorable riposte, “The dollar is our currency but it’s your problem,” whence the title of this book. The dollar remains a problem for the rest of the world, primarily because it puts them at the mercy of the Federal Reserve and U.S. deficits; however, the dollar is also very useful to them.

Since Connally’s zinger, the dollar has depreciated by 87 percent in purchasing power, based on the Consumer Price Index, and in the same 54 years, the dollar has depreciated by 99 percent against gold. At the Bretton Woods parity of $35 per ounce, $1,000 would buy you more than 28 ounces of gold. Now it buys you little more than one-quarter of one ounce. Notwithstanding its depreciation, the greenback dollar and the accompanying Nixonian world monetary system reign supreme.

Rogoff considers both the historical and the structural reasons for this. Historically, the current system evolved from the state of the world at the end of World War II, a period marked by vast destruction. “The global economic supremacy of the United States after World War II was breathtaking,” he writes, “in 1950, the U.S. economy accounted for an astounding 36% of global GDP.” The financial dominance was even greater.

Along with that went military power. In the days of the dominant pound, the global power of the British Royal Navy went together with the financial power of the Bank of England. Likewise, as Rogoff observes, “Dollar dominance makes it easier to finance the military and, in particular, to fund sudden buildups.” I have long thought that buying U.S. debt by other countries, particularly Japan and Germany, and their taking big losses occasionally on those bonds, should be considered as paying in part for the defense umbrella America provided them. There is a “fundamental connection between military power and currency dominance,” Rogoff concludes. A key point.

Today’s currency dominance of the greenback continues the Bretton Woods dollar's previous dominance. “Thanks to network effects international currency usage is a natural monopoly,” Rogoff says. “Once a currency establishes itself in international transactions, the use of most other currencies falls by the wayside.” With the dollar’s “central role in the pricing of international goods and financial assets”; when “90% of all foreign exchange transactions involve the dollar”; with the U.S. economy still being the largest in the world and representing about 25% of global GDP; and with its having the biggest, deepest and most liquid financial markets, “which remain disproportionately large relative to U.S. income”; the network dominance is logical. But also required is that the Federal Reserve act as central bank to the dollar-using world, not just to the United States. Rogoff helpfully discusses how the Fed does this.

He addresses another essential factor in currency dominance: “Above all, the United States has an established rule of law that is more favorable to creditors than the laws of most countries.” At the same time, in a kind of balance, “For better or for worse, the entire structure of America’s system rewards risk-takers, perhaps because of more generous bankruptcy laws.” This is a striking point and overall is certainly for the better. Taking these institutional advantages together, Rogoff concludes, “It was not just a turn of world history that made the United States banker to the world but a set of legal institutions far better suited to being a banker country.”

But being on top once, even with network effects and institutional advantages, does not guarantee the “evolution of the system as the inevitable and only possible outcome,” Rogoff reflects. “The pound’s glory days as the global currency became a distant memory.” Will the global greenback similarly become a memory, or will it retain its dominance and its matching “exorbitant privilege” in international borrowing?

The book considers the challenges to U.S. currency dominance from the erstwhile Soviet Union, Japan, a united Europe, China, proposals for an international currency (which is not any national currency), and cryptocurrency. All of these deserve the subtle discussions Rogoff provides, but here are a few highlights. Then we will end with the biggest problem: “unsustainable government debt trajectories.”

“We now know that the Soviet Union’s economy was never going to catch up to the United States,” Rogoff says, but reminds us that in the 1961 edition of Nobel Prize-winner Paul Samuelson’s famous college economics textbook, “Samuelson argued that it would likely catch up…between 1984 and 1997.” Instead, in that period, the Soviet Union crumbled economically and collapsed.

Turning to Japan, “Memories fade,” Rogoff writes while reviving the memories, “but from the late 1970s to the early 1990s, there was a widespread view and fear that Japan would eventually overtake the United States.” No longer. Instead, Japan had a giant double bubble and bust in equities and real estate. “The view was that land prices would never go down,” but they fell 80%. Part of the story is that “the United States forced Japan to drastically appreciate the yen in the mid-1980s.” In one of the many personal anecdotes that make this book charming, Rogoff recalls becoming an investor in Japanese stocks in 1985. “Let’s just say that my Japanese stock purchase was a fantastic investment for several years and would have been amazing if I had pulled out in 1989 instead of 1996.”

(Other anecdotes include showing up in a “discount-rack electric-blue polyester suit” for his unsuccessful Rhodes Scholarship interview; feeling “as if I were in a James Bond movie” in an elegant meeting with the premier of China; having the finance minister of Lebanon tell him, “If the finance ministry were to announce tomorrow that Lebanon is going to change its fixed dollar exchange rate, I would be found floating face down in the Beirut River”; having debates with other distinguished economists; playing chess against an AI program; and finding it “futile” to disagree with the Fed chairman when that was “The Maestro.”)

The Euro was designed to be a competitor to the dollar and “is easily the most important alternative to the dollar,” Rogoff writes, but “remains largely a regional currency,” not a global competitor. Its main problem is “the lack of a strong fiscal authority” to match the extent of the currency—one might say, the lack of an Alexander Hamilton. But Rogoff hedges with “just as Europe surprised many economists by pulling off the single currency, it may surprise again.”

The Chinese renminbi “would appear to be a far more potent threat.” Like Japan before it, China had a long period of tremendous economic growth. Then it too inflated a giant real estate bubble – making GDP rise by building empty apartment buildings – and the bubble continues to deflate. Rogoff concludes that China’s long-term growth rate is slowing, that “it still trails in the rule of law, the depth and liquidity of financial markets, and the pricing of goods, [so] it is hard to see a scenario in which China’s currency is widely used in the West.” A final long-term weakness: although “Westerners…have long been stunned by the overall quality of Chinese bureaucrats,” now, "it is quite clear that political loyalty has become a bigger factor than merit.”

In Rogoff’s view, an international currency (going back to the one proposed by J.M. Keynes as an alternative to the Bretton Woods dollar) won’t work in the real world of powerful states, since it will lack the required political power. Cryptocurrencies will not prevail over the dollar for legal transactions, because governments will take over whatever monetary innovations may threaten them. These seem reasonable conclusions.

However, Rogoff sees a sustainable business for cryptocurrencies, perhaps especially for stablecoins, in “becoming the currency of choice for the underground economy.” Stablecoins are principally based on dollars, so they are part of the dollar’s global dominance. But they might serve “as a substitute for hundred-dollar bills [that are] so popular abroad,” and thus threaten a highly profitable business for the Federal Reserve. With interest rates at 4 percent, the approximately $1 trillion of U.S. currency circulating abroad creates profits of about $40 billion a year for the Fed.

We come to what Rogoff deems the “Achilles’ Heel” of the United States and the greenback: “The United States is running deficits at such a prolific rate that it is likely headed for trouble in almost any scenario.”

This reflects a profound change in government finance: “The idea of having governments borrow promiscuously in peacetime is relatively new.” In contrast, “In earlier times, the country bestowed with the dominant currency would use its privileged borrowing status mainly to finance wars,” while “in peacetime it typically ran surpluses.” But now borrowing happens at all times, notably to finance ongoing consumption, as well as wars and investments. This is a huge change. “It was during the twenty-first century,” Rogoff tells us, “that the United States’ fiscal profligacy really picked up a head of steam” as a bipartisan creation, with “much of the sharp rise [coming] from the bulge of old-age support payments.”

One must wonder, as Rogoff does, how long such borrowing can go on. As always, it is until the lenders are unwilling to buy more debt. If or when they are no longer willing, there are only four choices, all unpleasant, as Rogoff clearly explains: explicit default on the debt; cuts in net government expenses (so-called “austerity”); forcing the central bank to print money to buy the debt and so run up inflation; or the “financial repression” of heavy-handed controls—such as forcing banks to buy the government debt, driving down interest rates below the inflation rate to expropriate savers, imposing capital controls, and prohibiting people from owning gold. For U.S. debt, explicit default and cutting enough expenses seem unlikely; that leaves inflation and financial repression, which are implicit defaults.

Will unprecedented debt ultimately drive the U.S. government to pick among these bad alternatives, as it has before? It seems likely to me. If it does, would the greenback dollar nonetheless continue to dominate all the other currencies? I suppose it would, but the exorbitant privilege would have become significantly less exorbitant.

Rogoff’s book gives us plenty to ponder on this and many other monetary issues.

Is the second U.S. housing bubble of this century starting to deflate?

Published in Housing Finance International Journal.

Although it is only one-quarter over, the 21st century has already featured two massive U.S. house price bubbles—a Double Bubble. The first one ended in a terrific bust, needless to say (or is it possible that group memory is already fading?). The second one has made houses widely unaffordable when mortgage interest rates are at normal levels. It may be topping out now, in the third quarter of 2025.

The inflation of the infamous first 21st-century housing bubble ran for over seven years, beginning in 1999. The government and private actors had both pursued riskier mortgage loans, the Fed sought a housing boom to offset the dot-com bust, and together they got a housing bubble. It had doubled average house prices by the time it topped out in 2006. This bubble was deflating by early 2007 and shriveling by late 2007. Average U.S. house prices fell by 27% over a painful period of about six years, finally bottoming in early 2012. This timing is close enough to always make me think of the seven fat years followed by seven lean years foretold by Joseph after Pharaoh’s dream of fat and lean cows in the Book of Genesis.

Neither the American nor the international financial system was as prepared as Joseph for the lean years. The price collapse intertwined with the unraveling of housing finance and set off the “Global Financial Crisis” of 2007–2009, including the panic of 2008 and the failure or distress, and government bailouts of numerous famous firms. These included, for example, the formerly AAA-rated global insurance company, AIG. As Walter Bagehot had correctly written 135 years before, “Every great crisis reveals the excessive speculations of many houses which no one before suspected.”

The emergency reactions of the Federal Reserve to the collapse of the first bubble and later to the Covid panic, as they continued for 14 years (2008–2022), featured nearly zero nominal short-term interest rates, negative real interest rates (that is, interest rates less than the inflation rate), and an entirely unprecedented $2.7 trillion investment in long-term, fixed-rate mortgage securities on the Fed’s own balance sheet. For its entire previous history, the Fed had never owned any mortgage securities. This radical action made the Fed the largest buyer of mortgages and drove the 30-year mortgage lending rate to under 4% and then under 3%, all stoking the second house price bubble. In addition, the Fed invested in $2.4 trillion of long-term Treasury securities to suppress long-term interest rates in general, while it monetized government deficits.

We can place the beginning of the second house price bubble in 2015. By then U.S. house prices had been rising again, but instead of returning to their long-term trend of increasing at a little over the inflation rate, they ran upward far faster than that, with a particular upward spike in 2020–2021.

At that point, 30-year fixed-rate mortgage loans were exceptionally cheap—their rates were pushed down by the Fed to lows of merely 2.7% in 2020 and 2.8% in 2021. The result is that buyers paid higher prices for their houses. For the twelve months ended July 2021, average house prices rose over 19%. Overall, in the inflation of the second bubble between 2015 and 2025, average house prices again doubled.

In March 2022, the Fed very belatedly stopped expanding its mortgage portfolio and started to increase short-term interest rates. Mortgage interest rates rose to over 4% and then over 5% in May of that year. In other words, the rates were returning to historically normal levels, but the impact of their rise on monthly payments compared to a 3% mortgage was very large.

Many people, myself included, thought average house prices would then necessarily fall. They did go down about 5% from an interim peak in June 2022 in the second half of that year, but then most surprisingly started back up and reached new highs, in spite of the interest rate on mortgages rising to 6% to 7% or more. The 2025 highs were almost 80% over the peak of the first bubble and were 7% over what had looked like the top in June 2022.

But now it appears that the market really is putting in the top of the long second U.S. house price bubble of this century. The AEI Housing Center reports average house prices increased only 1.3% for the year ending in August 2025, less than the general inflation rate, and forecasts 0% average house price growth for the year 2025 and –1% for 2026.

The financial commentary Wolf Street reports that for July 2025, house prices fell on a year-over-year basis in 20 of the 33 U.S. metropolitan areas it tracks. It adds that prices of mid-tier houses have declined more than 10% from their 2022 peaks in twelve U.S. cities, with the five biggest falls being in Oakland, California: –23%; Austin, Texas: –23%; New Orleans, Louisiana: –18%; Cape Coral, Florida: –18%; and San Francisco, California: –16%.

Even after these reductions, house prices are still at highly inflated levels, so the price deflation should continue. Correspondingly, inventories of houses offered for sale are rising rapidly while the volume of house sales is low, and home builders are having to offer significant price concessions to sell new houses.

If the second bubble is finally starting to deflate, how far can prices fall and for how long? After ten fat years, how many lean years could there be this time, even if the U.S. has avoided the egregious credit mistakes of the first bubble? Will the Federal Reserve be tempted to get back into expanding its mortgage portfolio? These are questions to which we don’t know the answer.

But we know for certain that highly leveraged real estate combined with extreme movements in central bank money printing create remarkable adventures in house prices and housing finance.

The GENIUS Act Ties Stablecoin Risk to Banking Risk

Published in RealClear Markets.

The "Genius Act," while claiming to create virtually risk-free backing for the stablecoins it promotes, in fact ties stablecoin risk to banking instability, which the financial system has unfortunately so often experienced.  Is it possible for banking risk to become stablecoin risk?  It already has.  Recall this news report from 2023 about a leading stablecoin: "Circle's USD Coin lost its dollar peg and fell to a record low [as] the company revealed it has nearly 8% of its $40 billion in reserves tied up at the collapsed lender Silicon Valley Bank.  USDC is designed to trade at $1, but it fell below 87 cents."  The stablecoin was saved by an egregious federal bailout of wealthy uninsured depositors like Circle.

Could this happen again under the Genius Act?  It certainly could.  Although it has been virtually never mentioned in the Genius Act announcements and discussion, the act allows uninsured, unsecured bank deposits as an investment for stablecoin reserves.  Are these deposits risky? You bet. Merely because money is deposited in a federally insured financial institution does not mean that all or even most of the money is insured. For large deposits, it is rather the opposite. Federal law imposes a $250,000 ceiling amount for insured deposits. Deposits beyond these amounts are uninsured, at risk and their holders become general creditors of the failed estate in a bank receivership. 

What this means is that if the bank or banks where a stablecoin issuer keeps deposits were to fail, amounts above the insured ceiling would suffer losses unless the feds caused the taxpayers to bail them out. In the Silicon Valley bank failure, Circle kept $3.3 billion of its reserves with Silicon Valley Bank, all but $250,000 of which would have had large losses imposed without the bailout. Since 1980, more than 2,000 commercial banks failed in the United States, and numerous others were bailed out. Moreover, the Genius Act permits reserves to be held in uninsured deposits at foreign banks if they are correspondents of U.S. banks, potentially including, for example, banks in the Bahamas and Cyprus, increasing the risk further.  

The role of uninsured deposits in the Genius Act contrasts with the administration's focus on how stablecoin reserves can be short-term Treasury bills or their equivalents, which unlike uninsured deposits are very safe. Many view the act as a way of ensuring a continued strong market for U.S. Treasury debt, which is essential to maintaining the dollar as the world's reserve currency, at a time when foreign governments seem to be paring back their holdings of Treasury debt.  The White House statement on the act stresses that the act provides for "strong reserves'" and will, "generate increased demand for U.S. debt," to help ensure "the continued global dominance of the U.S. dollar as the world's reserve currency." Expanding the forms in which reserves can be held from short-term U.S. Treasuries to uninsured deposits in domestic and foreign banks greatly increases risk, however. Because of this, we believe the law does not require strong reserves, may not greatly increase demand for U.S. debt, and may help cause a crypto crash and a taxpayer bailout. 

The Genius Act further increases risk because it not only permits stablecoin reserves to be held as uninsured deposits but has other provisions that make it more likely that reserves will be held in such form. The law permits a subsidiary of an insured financial institution to issue stablecoins. No provision of law would prevent the subsidiary from holding its reserves in uninsured deposits at its parent bank. This creates a very favorable business model for banks. A bank subsidiary could issue stablecoins, on which the Genius Act prohibits paying interest, and charge a fee for such issuance. The subsidiary could then deposit these funds as reserves in its parent bank in a non-interest- bearing deposit. The bank could then use these funds, which are free money to the bank, to make loans or buy securities, thus enjoying a very profitable spread. This business model would in most circumstances be more profitable than merely investing the proceeds in short-term U.S. Treasury bills.  

Jamie Dimon, an historic crypto skeptic, has made an exception by endorsing stablecoins and stating that JP Morgan would issue them. Citigroup and Bank of America executives have also stated that they would get involved.  By issuing stablecoins, these banks will have deposits for which they pay nothing to fund their businesses. No wonder the banks are now stablecoin fans.  A continuing source of deposits on which no interest is paid is to a banker what the Holy Grail was to a knight of the Roundtable.

An even more striking risk may come from crypto entrepreneurs who set up banks to issue stablecoins though the banks' subsidiaries. We believe that the business model outlined above will be very compelling to stablecoin issuers. This is analogous to the 1980s when real estate developers were permitted by regulators to set up savings and loan associations to fund their developments and other real estate activities, contributing to the failure and taxpayer bailout of the savings and loan industry.  We believe that the Genius Act by permitting reserves to be held in uninsured deposits provides stablecoin issuers with a strong incentive to set up banks to use those reserves to fund more profitable and riskier lending activities, rather than choosing to invest in low-yielding short-term Treasury securities.   Placing these reserves in uninsured bank deposits would expose stablecoin holders to the risks of bank failures and the taxpayer to the risk of supporting another bank bailout. 

Bank regulators might prevent the risk of intertwined stablecoin issuer-bank failures by imposing rigorous regulatory standards, effectively enforced. Under the Genius Act, the regulators are granted broad powers to do such things. But will they? First, there will be enormous pressure on the regulators to allow wide participation in what has been designed as a highly profitable activity. In addition, this administration has family participation in cryptocurrency and has in key regulatory positions people who have taken very pro-crypto positions and, in some cases, had business ties to crypto companies prior to their government service.  Even if the regulators do their best, regulation has never stopped banks from failing or from repeatedly turning bank failures into systemic banking crises. If a crypto-funded bank were to fail, having pro-crypto industry regulators may increase the possibility that they would recommend a taxpayer bailout.

When the authors were at the Treasury Department, we were charged with identifying threats to financial stability.  The Genius Act would have made our alarm bells sound.

Mr. Adler, an attorney, served as deputy assistant Treasury secretary for the Financial Stability Oversight Council, 2019-21.  Mr. Pollock, with the Office of Financial Research during the same period, is a senior fellow at the Mises Institute.

Do We Really Need a National Price Fixing Committee for Interest Rates?

Published in The New York Sun.

The Federal Reserve’s own chairman says it’s ‘navigating by the stars under cloudy skies.’

What if the Federal Reserve did not exist? Would there still be interest rates? Would there still be a bond market, a market in short term paper, banks paying interest on deposits and charging interest on loans, and the Treasury still issuing debt to investors? Would the interest rates still reflect the economic outlook? Did these things exist before the Fed was created in 1913?

The answer to all these questions is “yes.”

As the Federal Reserve’s Open Market Committee gets ready to meet this week, the press yet once again treats us to endless discussions about what this government committee will decide interest rates should be. How will it react to increasing inflation, employment issues, and White House politics? Should interest rates be changed by exactly one-quarter of one percent or by exactly one-half?

It is as if people have somehow come to believe that no one would know how to establish interest rates if the Fed didn’t tell them what to do. It seems like many people really believe that this committee somehow knows best what interest rates should be. The question to think about, though, is: Do you believe it?

Acceptance of this centralized price fixing is an odd and anomalous feature in a country that knows that markets using price signals produce vastly more efficient economic outcomes than government central planning can, in particular than the government can do in respect of fixing prices.

There is no doubt that for the government to set up a national price fixing committee is in general a really bad idea. No centralized committee, no matter how intelligent, experienced, and educated its members may seem to be, or how many computer models they may run, or how many economics Ph.D.s they employ, can possibly know enough to do this.

They cannot cope with how countless interacting factors, including the effects of innovation and entrepreneurship, are changing and adapting, or will change as unpredictable shocks occur and trends reverse, as expectations and hopes or fears about the future shift. In short, the Fed’s efforts, no matter how sincere, share with all attempts at government central economic planning the inescapable knowledge problem: the impossibility of the requisite knowledge ever being in one place.

This was intellectually demonstrated by Ludwig von Mises and Friedrich Hayek a century ago and has been confirmed by much sad experience since, from the continuous failure of socialist economies to the two government-promoted house price bubbles the United States has already undergone in the first quarter of the 21st century.

An example particularly relevant to the Fed’s meeting this week, and every time, is the unknowability of the “natural rate of interest.” The Fed must worry about how whatever interest rates it commands into being relate to the natural rate, mathematically written “r*” and pronounced “r-star.”

This is the theoretical inflation-adjusted rate at which the economy will operate at full employment and stable inflation, neither too stimulated nor too constrained. It is, according to the New York Fed, “a critical benchmark for central bankers.” Unfortunately for these price-fixers, it is a purely theoretical interest rate, which can never be observed.

Thus estimates of this “critical benchmark” are always uncertain. This fundamental problem gave rise to a great aphorism of Chairman Jerome Powell of the Fed Speaking of the uncertainties the central bank faces, and referencing the question of r-star, Mr. Powell was addressing the 2023 central bankers bash at Jackson Hole, Wyoming. With admirable candor and sharp wit, he told them: “We are navigating by the stars under cloudy skies.”

I think that deserves to be preserved in Federal Reserve lore right up there with William McChesney Martin’s famous line about “take away the punchbowl.” It concisely displays why we should pity the members of the Federal Open Market Committee as they meet this week.

They must know in their hearts that they do not and cannot know the economic and financial future, and that they thus cannot know what interest rates should be. Yet they must play their parts in a public drama on a world-wide stage. Based on what they do and say, all subject to deep uncertainty, a lot of money can change hands and large unintended results can occur. Yet: “The show must go on.” Or must it? Do we really need a national price fixing committee for interest rates?

How Congress Could Take Back Control of Money From an Inflationary Fed

Published in The New York Sun.

The Federal Reserve unilaterally announced in 2012 that it was committing the United States to perpetual inflation. It simply assumed that it had the power on its own authority to do this, and thus to constantly depreciate the value of our money at some rate of its own choosing. This was a remarkable claim, and Congress should make it clear that it was a mistake.  

The Fed’s announced goal of 2 percent inflation forever means mathematically, although of course the Fed never mentions this publicly, that the central bank promises to make average consumer prices quintuple in a lifetime of 80 years.  It made this quintuple-the-prices promise despite of the fact that the Federal Reserve Act instructs the Fed to pursue “stable prices.”  

How in the world did the Fed think it that had purely on its own say-so the authority to determine the nature of the money for the United States?  The most credible hypothesis seems to be that the Fed believed its own press releases about how “independent” it is.

Under the Constitution, the monetary powers of the government, in particular regulating the value of money, unambiguously belongs to the Congress. See Article I, Section 8. The Fed should be independent of the U.S. Treasury and President, who should not be able to order it to print up the money they want to finance the Treasury‘s deficits. The Fed, though, is fully accountable to the Congress for all its strategies and actions, especially anything as essential as committing America to perpetual depreciation of its currency.

That should have taken formal Congressional approval, but got not even hearings, let alone an approval.  The chairman of the Fed at the time, Ben Bernanke, has written that he had some informal personal discussions with individual members of Congress, but that is far from formal approval by the Congress.

It is not too late for Congress to carry out its Constitutional authority over creating money and regulating the value thereof. Here are six steps Congress should take:

1. Make it explicit in the Federal Reserve Act that the Fed must have Congressional approval to commit the country to any long-term inflation target. Congress should suspend the 2 percent inflation target unilaterally announced by the Fed until such time as Congress has approved it or some other fundamental policy.  For a better policy, I recommend stable prices and sound money. This could include a long-run average inflation target of approximately zero, with variations in the short term in a range of, say, between negative 1 percent and positive 2 percent. 

2. Carry out a regular, formal oversight of the Fed’s financial statements. The combined Fed has accumulated operating losses in the amazing amount of $238 billion, which have wiped out its capital of $46 billion many times over. The Fed is designed to make profits for the government and it is impossible to believe that the Fed intended to lose $238 billion instead. This is a loss to the taxpayers.  Congress should be conversant with the financial risks the Fed decided on its own to take or wants to take going forward.

3. Require the Fed, like the rest of the government, to follow standard accounting as defined for government entities by the Financial Accounting Standards Advisory Board. The Fed’s balance sheet hides its negative capital by pretending that its losses are an asset, while claiming it has the power to make up its own accounting rules. This claim should be overruled.

4. Require the Fed to steadily reduce its $2.1 trillion in mortgage investments to its historically normal level of zero. The Fed should not use its monopoly money power to subsidize any particular economic sector or interest. The mortgage investments are an important cause of the Fed’s losses; moreover, they stoked rapid house price inflation, which led to today’s unaffordable prices.

5. Recapitalize the Fed, which, with an actual capital of negative $192 billion, is technically insolvent. The first step should be to require the Fed to exercise the call it already has on all its private bank shareholders to purchase the half they have not yet paid in of their already committed subscriptions to Fed stock. It’s time for more capital and that would raise a new $39 billion. Further steps could be considered.

6. Require that Federal Reserve Bank dividends to the stockholders be paid only out of current profits or retained earnings. If there are none of either, then no dividends could be paid. One would think this principle would be obvious, but apparently it isn’t to the Fed.

With these steps, the Federal Reserve would get the message of who really has the money power under the Constitution.

No Easy Exit Emerges for the Federal Reserve as It Runs Up Mind-Boggling Losses

Published in The New York Sun.

There’s no rabbit to pull out of any hat when it comes to cutting the Fed’s interest expense.

The Federal Reserve’s accumulated operating losses reached $234 billion as of July 2. A mind-boggling sum. Subtracting these losses from its paid-in capital and retained earnings, which together total $46 billion, shows the central bank’s real capital is negative $188 billion.

Meaning — its losses have run through all the capital its private bank shareholders invested and the associated retained earnings five times. This is embarrassing for the greatest central bank in the world, which certainly did not plan to lose this much money. Neither were these huge losses expected by Congress or by American taxpayers.

The Fed’s losses in excess of its capital are a cost to taxpayers. Its negative capital means it has borrowed and spent nearly $200 billion of public money without the approval of Congress, solely to which the Constitution grants the power to borrow money on the credit of the United States. The Fed took an enormous financial risk without the approval, and perhaps without the awareness, of Congress.

The Fed’s losses reflect the simple fact that the interest expense it pays, primarily on the deposits held with it by private banks (often called “reserves”), is far greater than the interest income it earns on the $6 trillion of investments it bought mostly at the top of the market in bond prices, a market top created by its own buying. This means that the Fed bought at the bottom of yields on those bonds.

The result is that in, say, 2024 the Fed had $159 billion in interest income, but $227 billion in interest expense, of which $186 billion or 82 percent of this expense was interest paid on its deposits from banks. It lost $68 billion even before paying any of its operating expenses, and had a net loss of $77 billion for the year.

A temptingly simple solution to the losses comes to mind. As suggested by Senator Cruz, just stop paying interest to the banks on their deposits. In 2024, this would have reduced the Fed’s expenses by $186 billion, flipping its $77 billion loss to a pro forma net profit of $109 billion.

As Mr. Cruz rightly points out, for most of its history the Fed paid no interest on its deposits. Indeed, from its founding in 1913 to 2008, or for 95 years, the Federal Reserve Act prohibited Federal Reserve Banks from paying any such interest, so the private banks automatically got zero interest on their Fed accounts.

Naturally, the banks did not like this, viewing it not unreasonably as a tax. They finally succeeded in getting the law changed, then the change accelerated with the support of the Fed, which was about to launch an unprecedented expansion of its balance sheet and wanted the banks to be happy holding far bigger deposits with it than ever before.

The banks now have about $3.3 trillion in deposits at the Fed. In June 2008, still under the old system, the total Fed deposits from banks were only $13 billion. The banks’ deposits with the Fed are now more than 250 times what they were then.

At this point, the Fed is paying on its $3.3 trillion in deposits from banks at an interest rate of 4.4 percent. This means it incurs an annualized cost of $143 billion; dropping that expense would easily make the Fed profitable again going forward. In the first instance, the government would like the Fed, and therefore the government, to keep that money.

Then what would happen, though? If the banks didn’t like getting no interest on $13 billion, imagine how they would hate getting none on $3.3 trillion. Their income would just have dropped by $143 billion a year.

Each individual bank would try to get out of its now zero-income deposits by investing in something else. It might buy Treasuries or other securities, invest in mortgages, make new loans of all different kinds, or all of the above.

As all of the banks did this together, interest rates would fall in an inflationary credit expansion. The Federal Reserve would have lost control of interest rates, which it would not accept, since one of its essential roles is to be the national price-fixing committee for interest rates.

Because of the magic of a fiat currency central banking system, no matter how much the individual banks reduce their individual Fed deposits, the aggregate banking system cannot reduce its aggregate Fed deposits. They would still be $3.3 trillion unless the Fed itself reduced them. The government would have forced the banks as a whole to provide it with $3.3 trillion of free funding. It would be fair to call this financial oppression.

The Fed could reduce its deposits by selling its own investments and shrinking its balance sheet. Yet the Fed has a nearly $1 trillion unrealized loss on its investments. By selling it, the central bank would realize large losses — not to mention driving the market against itself.

The Fed will not do this. So in sum, considering Mr. Cruz’s idea leads to the conclusion that there is no easy way out of the upside-down financial position the Fed has gotten itself in.