'Financial Repression Is Coming,' Warns Lawrence McDonald As Ted Cruz Seeks To End $1.1 Trillion Fed Interest Payment Scheme
Market veteran Lawrence McDonald warns of impending financial repression due to a GOP proposal led by Sen. Ted Cruz to eliminate federal interest payments to banks. Cruz argues that the current program costs taxpayers over $100 billion annually and has totaled $1.1 trillion, benefiting foreign institutions. While McDonald expresses concern, some experts, including Jeremy Siegel, support the proposal, while JPMorgan warns it could create liquidity issues for banks.
Market veteran Lawrence McDonald has a stark warning regarding a recent GOP proposal spearheaded by Sen. Ted Cruz (R-Texas) that calls for nixing federal interest payments to banks.
What Happened: On Wednesday, McDonald, the founder of the newsletter The Bear Traps Report, posted on X, quoting a post by Bloomberg reporter Steven Dennis.
The post shared by Dennis features a fact sheet containing a proposal by Cruz to eliminate the interest rate on the reserve balances (IORB) program instituted in 2008. According to Cruz, the policy costs taxpayers more than $100 billion annually and has cost an estimated $1.1 trillion over time, with nearly half of it going to foreign financial institutions.
“It makes no sense to keep enriching banks, especially non-American ones, while the American taxpayer suffers under ballooning deficits,” Cruz wrote in the circulated fact sheet.
While this measure was adopted to stabilize the financial markets during the 2008 financial crisis, it’s potential repeal is being flagged by McDonald as financial repression.
“Financial repression is coming,” McDonald wrote on X, drawing parallels between this proposal and other crisis-era moves, which involve the government channeling funds from the private sector to itself, in order to tide over deep fiscal stress.
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Why It Matters: While McDonald has raised concerns regarding Cruz’s plans, several other experts and economists have come out in support.
This includes Jeremy Siegel, a senior economist at WisdomTree, who called the political interest in the Fed’s operating regime a “potentially underappreciated development.”
The strategists at JPMorgan Chase & Co. JPM, however, have warned against this move, saying that abolishing the IORB will lead to liquidity issues for banks, alongside the crowding of participants in Treasury bills, repurchase agreements, and fed funds.
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