Aaron Klein on the US's Real-Time Payments Problem and the Impact of Covid Era Quantitative Easing

Episode Summary

Executive Summary: Aaron Klein argues that the Fed has long neglected retail payment modernization, leaving paycheck-to-paycheck households exposed to delays, overdraft fees, and check-cashing costs. He also contends the Fed’s post-COVID mortgage QE materially inflated housing prices by buying too much of one asset, worsening affordability, inequality, and political anger, and says the Fed should be more accountable, transparent, and legally responsive.

Main Topics: Fed payment rails and retail payment delays (Priority: 5/5): Klein and Beckworth revisit the FedNow/Fed payment debate, arguing the U.S. retail system remains too slow compared with real-time systems abroad, harming households that need immediate access to wages. Costs imposed on paycheck-to-paycheck households (Priority: 5/5): Delays in funds availability force people into overdrafts, check cashing, and other expensive workarounds, especially when paydays fall near holidays or weekends. FedNow, pricing, and access issues (Priority: 4/5): Klein says FedNow is designed in a way that limits consumer use, leaves banks free to charge markups, and has not meaningfully solved the underlying problem of immediate funds access. QE, mortgage purchases, and housing inflation post-COVID (Priority: 5/5): Klein’s paper argues the Fed’s mortgage-backed securities purchases during COVID were large enough to raise house prices substantially, making housing inflation a major driver of overall inflation. Fed governance, transparency, and legal compliance (Priority: 4/5): Klein criticizes the Fed for ignoring statutes and accountability mechanisms, contrasting its behavior with the CFPB’s response to his petition and calling for stronger oversight. Housing affordability, inequality, and politics (Priority: 4/5): The transcript links higher home prices to wealth transfers toward existing owners, reduced affordability for first-time buyers, and political backlash from younger and renter households. What the Fed should buy in crises (Priority: 3/5): Klein argues the Fed should rethink QE assumptions, reduce reliance on mortgage-heavy interventions, and consider broader or more neutral asset purchases, while preferring direct fiscal support for households and firms.

Key Arguments: Retail payment systems should operate in real time because delayed wage access creates avoidable hardship and costs for people living paycheck to paycheck. Check cashing is not just a problem of the unbanked; most users already have bank accounts but need immediate cash flow. The Fed’s slowness on payment modernization has preserved lucrative overdraft and fee revenue for banks at the expense of consumers. FedNow does not solve consumer payment access because retail users cannot directly initiate it and banks can charge large markups for access. The Fed’s COVID-era mortgage QE was not neutral: buying an outsized share of mortgage-backed securities likely pushed home prices higher. Housing inflation was a major contributor to headline inflation, while excluding housing would have brought inflation closer to 2%. The Fed ignored warnings and legal obligations, including the Expedited Funds Availability Act, and has been less accountable than other agencies such as the CFPB. The housing price surge worsened inequality by helping existing homeowners while pricing out first-time buyers and renters. Political anger over inflation and housing affordability may have shifted voter behavior, especially among younger people. In crises, direct fiscal tools are often better suited than central-bank financial engineering, especially for Main Street support.

Data Points: FedNow build time compared with England: 4-5 years vs. 18 months - Klein contrasts the Fed’s slow rollout of FedNow with England’s rapid real-time payments launch in 2008. Paper publication date: February 28, 2020 - Klein and George Selgin’s American Banker article on payment rails and real-time payments. Check-cashing users with bank accounts: 70% - Klein cites FDIC data showing most check-cashers already have bank accounts. Stimulus check fees during COVID: Over $600 million - Dan Murphy’s Brookings-related work on government stimulus checks cashed for fees. Potential consumer savings from faster payments: Over $100 billion - Klein’s 2019 research estimate if the U.S. had adopted real-time payments earlier. Updated savings estimate: North of $200 billion - Klein’s more recent view of the savings from faster payments and reduced fees. Mortgage QE share of market: About 90% - Klein says the Fed bought roughly the equivalent of 90% of mortgages made in the country over several years. Home price increase: About $100,000 - Median U.S. home value rose sharply during COVID-era QE, according to Klein. Median home price before/after: ~$275,000 to $375,000 - Klein uses this change to illustrate the scale of the housing shock. Inflation excluding housing: Near 2% - Klein argues headline inflation looked much higher largely because of housing costs. Inflation including housing: Closer to 3% - Housing raised measured inflation materially after the pandemic. First-time homebuyer trend: Falling share; higher median age - Klein says housing inflation reduced affordability for new buyers. Prior Fed response delay on mortgage rules: 2007 vs. 1994 statutory deadline - He cites the Fed’s delay in issuing subprime-related rules under HOEPA as an example of ignoring law. CFPB response time to petition: About 3-4 months - The CFPB responded to Klein’s petition on funds availability with public comment and a decision. ECB real-time payments rollout: Across 19 countries in 2019 - Klein cites the Eurozone as an example of faster, broader payment modernization. Section 14 purchases focus: Treasuries and GSE mortgage-backed securities - Klein notes the legal structure that concentrated QE in housing-related assets.

Pivotal Quotes: "The rest of the world would tell you it'll be there in 30 seconds, in two minutes." — Aaron Klein: Explaining why paycheck delays are unnecessary in a modern payments system. "If you buy 90% of a market, you're going to increase the price of that market good." — Aaron Klein: Core claim of the paper on QE and housing inflation. "The Fed flop is a Fed flop by design." — Aaron Klein: His critique that FedNow was structured to avoid cannibalizing bank fee revenue and limit consumer utility.

Implications: The transcript warns that slow payments and housing-targeted QE can quietly transfer wealth upward, amplify inequality, and fuel political backlash. It calls for faster retail payments, stronger Fed accountability, and more careful crisis tools that avoid distorting essential markets like housing.