We have been growing an Asset Bubble since the 80s

The absolute price of housing has been increasing since the 1980s.

There are a lot of reasons for it, but declining interest rates are a key cause of increasing housing prices.

For the United States, our estimates for the period from 1970 to the end of 1999 suggest that a 100 basis-point fall in the nominal short-term rate, accompanied by an equivalent fall in the real short-term rate, generated a 5 percentage point rise in real house prices, relative to baseline, after three years

So it makes sense that people are apoplectic over inflation, but I suspect the underlying cause is...

  • With inflation comes higher nominal interest rates
  • With higher interest rates comes lower house prices
  • With lower house prices, all the assets that are pegged to house prices have to written down

So... who cares about this problem?

  • People who have a substantial among of wealth tied up in their house
  • Financial market participants that root securities values in houses

One we care about (natural people) and one we don't. However, there are factors that cause the latter to impact the former... e.g., investments in 401K accounts for example.

And any unwinding of housing prices because of higher interest rates will be ugly. It'll be a run on the housing market as folks try to unload their houses before rates go up more, but the act of unloading houses will drive prices down which will cause concern and drive more people to try to sell their houses.

Just like an "old fashioned bank run", we risk a run on both housing assets and the web of assets tied to housing assets.

And just like FDIC insurance on bank accounts, there's a fix for the problem.

We need a Federal Reserve/Postal Service banking program

The first step is to create a Postal Bank and issue an account to every citizen and permanent resident.

Next, we pass laws that direct the Federal Reserve to issue "Retirement Gap Notes" and deposit that Retirement Gap Notes in the Postal Bank accounts under certain conditions which include:

  • Selling a house at > 10% below peak asset value... basically if you've got your retirement wealth in your house, you get a Retirement Gap Note that makes you whole
  • 10% decline in 401K or other retirement oriented investments, but corrected for the riskiness of the investment... higher risk, lower percentage of loss covered

The Retirement Gap Notes will operate much like Social Security. They will be inflation protected using the same formula that Social Security uses. Thus, if you get a $200,000 Retirement Gap Note at at 50, it will have the same real purchase power when you start drawing from it.

And the right to draw from the Retirement Gap Notes kicks in at 65 like Social Security. The withdrawal rules from the notes is similar to the receipt of Social Security... periodic, not lump sum.

The Retirement Gap Notes can only be shared with spouses and domestic partners, not children or other relatives.

Also, no hypothecation. You can't use the Retirement Gap Notes as assets for the purposes of loans. However, income from the notes can be used for the purposes of income when taking out loans.

There will also be a cap to the total Retirement Gap Note value for individuals and families. Maybe $2M per individual. Because if you need more than $2M (~$8K/mo for 20 years), you're outside the demographic that needs a government floor... much like FDIC insurance was $100K/person/institution prior to 2008 and $250K these days.

Yeah, but what about the financial markets and institutions

Do what Iceland did).

Let them fail.

Send a message that the US will protect individuals up to a point, but will no longer facilitate moral hazards.

How do we gather the information?

From tax records. All the information needed to compute the Retirement Gap Notes is available from tax records.

Put another way, Zillow can tell me all kinds of information about house values, histories of the value, etc. If they can do it, the government can, too.

We'll take our marbles and go someplace else!

I'm sure the financial institutions will pound on the table with that message.

Where? Someplace where there's a large enough government and Federal Reserve equivalent that can backstop moral hazards that range into the trillions of dollars...

Yeah, maybe China will attract some of the money... but at the end of the day, China's government is all about China's interests and that's a risk that might outweigh the risk of the US government not back-stopping moral hazards.

But at the end of the day, business goes where there are customers. If the US guarantees that there will be liquidity in consumer pockets, that makes customers. And businesses will stay.

But a Postal Bank will be too competitive

I doubt that.

A postal bank will cost large banks the kind of customers they don't like (low asset values, higher risk), but that they monetize through fees.

So, banks will have to go back to making money the old fashioned way... by borrowing money via deposits and loaning that money to low risk borrowers.

Is this idea perfect?

No... but I believe it takes us back to the New Deal philosophy of supporting people to support business rather than our current mode of supporting financial service businesses hoping those businesses will be nice to individuals.

There are also tensions I'm not seeing, so the actual programs will have to deal with those tensions.

But won't this increase government debt?


It's between the Federal Reserve Bank (the issuer of the notes and the entity that converts the notes to $s) and citizens.

The US government does not need to fund this effort. And it may generate revenue from taxing the redemption of Retirement Gap Notes.