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above the prior record high of 7.0 set in 2005.'* The mortgage-payment-toincome ratio hit 43.3 percent in August 2022—breaking the highs of the prior housing bubble in 2008.”° Mortgage payment on a median-priced home (with a 20 percent down payment) jumped to $2,408 in the autumn of 2022 vs. $1,404 just one year earlier as home prices continued to rise even as mortgage rates more than doubled. Renters have not been spared: Median apartment rental costs have jumped more than 24 percent since the start of 2021.7° Numerous cities experienced rent increases well in excess of 30 percent.

A primary driver of higher costs during the past three years has been the Federal Reserve’s purchases of mortgage-backed securities (MBS). Since March 2020, the Federal Reserve has driven down mortgage interest rates and fueled a rise in housing costs by purchasing $1.3 trillion of MBSs from Fannie Mae, Freddie Mac, and Ginnie Mae. The $2.7 trillion now owned by the Federal Reserve is nearly double the levels of March 2020. The flood of capital from the Federal Reserve into MBSs increased the amount of capital available for real estate purchases while lower interest rates on mortgage borrowing—driven down in part by the Federal Reserve’s MBS purchases— induced and enabled borrowers to take on even larger loans.”! The Federal Reserve should be precluded from any future purchases of MBSs and should wind down its holdings either by selling off the assets or by allowing them to mature without replacement.

Stop paying interest on excess reserves. Under this policy, also started during the 2008 financial crisis, the Federal Reserve effectively prints money and then “borrows” it back from banks rather than those banks’ lending money to the public. This amounts to a transfer to Wall Street at the expense of the American public and has driven such excess reserves

to $3.1 trillion, up seventyfold since 2007.” The Federal Reserve should immediately end this practice and either sell off its balance sheet or simply stop paying interest so that banks instead lend the money. Congress should bring back the pre-2008 system, founded on open-market operations. This minimizes the Fed’s power to engage in preferential credit allocation.

MONETARY RULE REFORM OPTIONS

While the above recommendations would reduce Federal Reserve manipulation

and subsidies, none would limit the inflationary and recessionary cycles caused by

the Federal Reserve. For that, major reform of the Federal Reserve’s core activity

of manipulating interest rates and money would be needed.

Acore problem with government control of monetary policy is its exposure

to two unavoidable political pressures: pressure to print money to subsidize