Did Taxpayers Really 'Profit' From Treasury Mortgage Program?

Treasury Building
Treasury Building

The US Treasury Department recently announced the results of the winding down of its mortgage bond program, under which the Treasury paid around $225 billion for mortgage-backed securities backed by guarantees from Fannie Mae and Freddie Mac.

The program bought mortgage bonds in 2008 amd 2009 as part of the government's financial crisis response. A year ago, it began selling the bonds back into the market through sales of as much as $10 billion per month.

The Treasury now says the total sales took in $250 billion, which the department says means it cleared a profit of $25 billion.

"The successful sale of these securities marks another important milestone in the wind down of the government’s emergency financial crisis response efforts," said Mary Miller, Treasury assistant secretary for financial markets, in the official press release.

"This program helped support the housing market during a critical moment for our nation’s economy and delivered a substantial profit for taxpayers."

There's no real room for doubt about the idea that the program "helped support the housing market." And since the Treasury sold the assets for more than it paid for them, calling it a profit seems fair enough.

But what happened here is that the Treasury originally spent $225 billion into the private sector and later withdrew all of that plus an extra $25 billion from the private sector. The private sector has 25 billion less dollars than it had before the "emergency financial crisis response." The amount of money in the private sector shrunk by the amount of the "profit for taxpayers."

"This is the financial equivalent of taxing $25 billion out of the private sector," Warren Mosler of MoslerEconomics says.

Part of the strangeness is that this was essentially a monetary operation, not a fiscal operation. We're quite used to the Federal Reserve purchasing and selling financial assets as part of its monetary policy. But having the Treasury do this is quite unusual.

When the Fed buys or sells an asset, its goal is to achieve monetary policy targets and meet its dual mandate of full employment and price stability. The Fed certainly understands that the prices at which it buys or sells assets are mostly monetary policy events, growing or shrinking dollars in the system.

The Treasury, however, apparently sees its job as earning a profit. It wants to maximize revenue from rescue operations, much the way it seeks to maximize tax revenues. It's not clear that they understand the monetary policy implications of their prices at all.

So why wasn't this a Fed operation? I'm told that there are those at the Fed who think it probably should have been. But the Fed has had its hands full and were happy to have the Treasury act Fed-like in this program.

It's hard to wrap your mind around: When the Treasury earns a "profit for taxpayers," the free market is left with fewer dollars and the Treasury with more.

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