Project 2025’s Fed Reform: Taking a Sledgehammer to the Housing Market and Monetary Policy
Project 2025 calls for banning the Fed from buying mortgage-backed securities, winding down its balance sheet to pre-2008 levels, and eliminating interest on reserves. These proposals would remove the backstop that stabilizes mortgage rates, raise borrowing costs for everyone, and hand credit allocation entirely to Wall Street.
Buried inside Project 2025’s 'Trade' chapter is a radical overhaul of the Federal Reserve that would, if enacted, make the housing crisis structurally permanent. The plan would prohibit the Fed from ever purchasing mortgage-backed securities (MBS), force it to sell off its current $2.1 trillion MBS portfolio, and stop paying interest on banks’ excess reserves — effectively punishing the Fed for intervening in housing markets while rewarding banks for holding cash instead of lending. The Heritage Foundation blames the Fed’s pandemic-era MBS purchases for the 42% surge in home prices between February 2020 and August 2022, but this is a deliberately narrow diagnosis. The real story is that the Fed’s emergency purchases stabilized mortgage markets during a once-in-a-century pandemic; the ensuing price run-up was driven by a toxic mix of supply shortages, investor speculation, and decades of federal underinvestment in affordable housing. Project 2025’s cure — yanking the Fed out of housing entirely — would leave Fannie, Freddie, and Ginnie Mae securities without a backstop, raise mortgage rates for everyone, and let private banks decide who gets credit.
The even more dangerous proposals — 'free banking,' abolition of the Fed, and a return to gold-backed currency — would eliminate the central bank’s ability to manage inflation, serve as lender of last resort, or respond to financial crises. Under free banking, each private bank would issue its own dollar-denominated notes backed by gold or other assets, policed not by any public regulator but by the self-interest of competitor banks. Historical experience with such systems, including the 19th-century Suffolk System the authors cite, generated chronic instability, bank runs, and wild swings in money supply. The result would not be the 'supply-side deflation' the authors promise; it would be a permanent transfer of monetary sovereignty from democratically accountable institutions to private financiers, exactly the opposite of what a fair-trade policy should deliver. The Fed, for all its flaws, at least operates under a statutory mandate to promote maximum employment and stable prices; Project 2025 would replace that mandate with nothing but the profit motives of the largest banks. Workers, renters, and first-time homebuyers — anyone who isn’t already a bondholder — would be the expendable casualties of this vision.
Original source — excerpted
project2025 Project 2025 ch. 26: Trade (pp 767-769)"— 734 — Mandate for Leadership: The Conservative Promise to influence monetary policy.12 Since then, these assets have exploded, and the Federal Reserve now owns nearly $9 trillion of mainly federal debt ($5.5 trillion)13 and mortgage-backed securities ($2.6 trillion).14 There is currently no government oversight of the types of assets that the Federal Reserve purchases. These purchases have two main effects: They encourage federal deficits and support politically favored markets, which include housing and even corporate debt. Over half of COVID-era deficits were monetized in this way by the Federal Reserve’s purchase of Treasuries, and housing costs were driven to historic highs by the Federal Reserve’s purchase of mortgage securities. Together, this policy subsidizes government debt, starving business borrowing, while rewarding those who buy homes and certain corporations at the expense of the wider public. Federal Reserve balance sheet purchases should be limited by Congress, and the Federal Reserve’s existing balance sheet should be wound down as quickly as is prudent to levels similar to what existed historically before the 2008 global financial crisis.15 l Li…"