Washington is debating nearly every aspect of economic policy, from taxes and tariffs to interest rates and the future of the Federal Reserve. Yet one of the greatest threats to long-term financial stability is barely part of the conversation: the continued expansion of credit far beyond the growth of the nation's underlying productive wealth.
Markets may continue climbing, but history suggests periods of financial optimism often mask growing structural vulnerabilities. Throughout America's 250-year history, cycles of speculation have repeatedly given way to financial crises. The creation of the Federal Reserve did not end those cycles. Instead, the speculative land, railroad and stock bubbles of earlier eras gave way to the Great Depression, the savings and loan crisis, the 2008 financial crisis and numerous episodes of financial turmoil in between.
Despite an increasingly complex web of financial regulations, we continue to repeat the same mistakes because policymakers have failed to confront a more fundamental problem: the unchecked expansion of credit.
The debate in Washington is largely about how to regulate finance after excesses emerge. It should also be about preventing those excesses from accumulating in the first place.
Today, the total value of financial assets in the United States is roughly twice the value of the nation's underlying nonfinancial assets. That does not mean financial assets are fictitious. Stocks represent ownership in productive businesses, and loans finance homes, businesses and investment. But it does mean an increasing share of wealth exists as layers of financial claims rather than direct ownership of the productive assets that ultimately support them.
This growing financial superstructure can increase leverage and make the financial system more fragile without adding to the economy's productive capacity. Put simply, the real economy—its land, factories, equipment and intellectual property—is increasingly overshadowed by an expanding network of equities, loans and other financial claims.
For much of American history, financial claims expanded alongside the nation's productive assets. As financial markets matured, greater use of banks and capital markets naturally increased lending and broadened ownership through stocks and bonds. By the mid-20th century, the value of financial assets was roughly equal to the value of underlying nonfinancial assets.
That relationship has fundamentally changed.
Using Federal Reserve balance-sheet data and previously published research on the U.S. balance sheet, financial assets are estimated to have reached nearly $250 trillion in 2025, compared with approximately $135 trillion in nonfinancial assets. Those figures exclude derivative contracts, which create additional leverage, as well as digital assets, which represent another growing layer of financial claims outside traditional balance-sheet measures.
A financial-assets-to-wealth ratio near one should be viewed as an upper boundary rather than a target because many individuals and businesses continue to own and use assets directly rather than convert them into financial claims. Ratios substantially above one suggest that financial claims are increasingly being layered upon one another instead of reflecting new productive wealth.
The result is a more highly leveraged financial system capable of generating substantial gains and equally significant losses without necessarily expanding the economy's productive capacity. This financial layering can also contribute to asset-price inflation that may eventually spill over into broader inflationary pressures.
If excessive credit creation is the problem, policymakers should focus less on continually expanding financial regulations and more on changing how credit is created in the first place. The objective should not be to eliminate lending but to ensure that financial claims remain firmly anchored to underlying wealth.
A more durable approach would require that loans and other contingent obligations be backed by existing wealth rather than by borrowed funds that are themselves claims on someone else's wealth. Put differently, credit should be created from genuine risk-bearing capital, not from repeatedly layering new financial claims atop existing ones. This principle resembles the full-reserve banking proposals advanced by economist Irving Fisher and others during the 1930s.
Banks could continue making mortgages, business loans and consumer loans by raising equity capital from investors willing to bear the associated risks. Different institutions could pursue different lending strategies, with some specializing in longer-term commercial lending and others focusing on shorter-term, higher-quality loans. Individuals and equity-funded institutions could likewise continue making direct loans, provided those loans were fully backed by existing wealth.
Nothing in this proposal would prevent the Federal Reserve from continuing to manage the money supply. The Fed could still conduct monetary policy so long as growth in the monetary base does not persistently outpace growth in the real economy.
Critics may argue that such a system would reduce the availability of credit. It would not. Mortgages, business loans and consumer credit would remain available because savings would continue flowing into productive investment. The difference is that new lending would be backed by actual risk-bearing wealth rather than by an ever-expanding chain of financial claims.
For decades, Washington has responded to financial crises by refining regulations, expanding oversight and responding to the excesses of the last boom. Those efforts have undoubtedly strengthened the financial system in important ways. Yet they have largely focused on managing the consequences of financial instability rather than asking what causes those vulnerabilities to accumulate in the first place.
As lawmakers debate the future of financial regulation, they should also consider a more fundamental question: Is the financial system creating more productive wealth, or simply creating more claims on that wealth? The answer will do more than shape the next regulatory agenda. It may determine whether the next period of financial optimism becomes another chapter in America's long history of boom and bust.
