{"id":304532,"date":"2025-10-13T12:00:35","date_gmt":"2025-10-13T11:00:35","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=304532"},"modified":"2025-10-07T07:17:56","modified_gmt":"2025-10-07T06:17:56","slug":"how-a-fed-overhaul-could-eliminate-the-us-federal-debt-crisis-part-i","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2025\/10\/how-a-fed-overhaul-could-eliminate-the-us-federal-debt-crisis-part-i\/","title":{"rendered":"How a Fed Overhaul Could Eliminate the US Federal Debt Crisis (Part I)"},"content":{"rendered":"

The Fed\u2019s Hidden\u00a0Drain<\/em><\/p><\/blockquote>\n

5 Oct 2025\u00a0<\/em>–\u00a0The Federal Reserve\u2019s independence is currently being challenged by political forces seeking to reshape its mandate. The Fed has not always been independent of Congress and the Treasury. Its independence was formalized only in 1951, with a\u00a0Treasury-Federal Reserve Accord<\/a>\u00a0that was not a law but a policy agreement redefining the relationship of the parties. In the 1930s and 1940s, before the Fed officially became \u201cindependent,\u201d it worked\u00a0with<\/em>\u00a0the federal government to fund the most productive period in our country\u2019s history. We can and should do that again.<\/p>\n

In a Sept. 1 Substack post titled \u201cFed Faces Biggest Direct Challenge by a President Since JFK \u2013 and This Is a Good Thing<\/a>,\u201d UK Prof. Richard Werner shows that there is no evidence that more independent central banks deliver lower inflation. In fact, per his findings, central bank independence has\u00a0no<\/em>\u00a0measurable impact on real economic performance, and greater central bank independence has resulted in\u00a0lower<\/em>\u00a0economic growth.<\/p>\n

This two-part series will probe the forces in play now to overhaul the Fed, and the feasibility of redirecting it to use its tools, including \u201cquantitative easing,\u201d not just to save the banks but to save the economy. Part I looks at a particularly flawed Fed policy \u2014 Interest on Reserves (IOR)\u00a0 \u2014 which burdens the budget, stifles liquidity, and subsidizes banks. Then it suggests ways that eliminating IOR and reining in the Fed\u2019s independence could solve the Treasury\u2019s interest burden altogether.<\/p>\n

A Unique Opportunity for a Fed Overhaul<\/strong><\/p>\n

In a paper in the Spring 2025 edition of\u00a0The International Economy\u00a0<\/em>titled \u201cThe Fed\u2019s New \u2018Gain-of-Function\u2019 Monetary Policy,<\/a>\u201d Treasury Secretary Scott Bessent argued that \u201coveruse of nonstandard policies, mission creep, and institutional bloat are threatening the central bank\u2019s monetary independence.\u201d He called for \u201can honest, independent, and nonpartisan review of the entire institution and all of its activities, including monetary policy, regulatory policy, communications, staffing, and research.\u201d<\/p>\n

In\u00a0a July 17 CNBC interview<\/a>, former Fed governor Kevin Warsh went further, calling for sweeping changes in how the central bank conducts business and suggesting a policy alliance with the Treasury Department. Warsh is considered one of three or four finalists to take over as chairman after Jerome Powell at the Fed.<\/p>\n

On August 25, Pres. Trump then sparked a political firestorm when he declared he was firing Federal Reserve Governor Lisa Cook \u201cfor cause,\u201d citing mortgage fraud allegations from Federal Housing Finance Agency Director Bill Pulte.\u00a0An NBC News report<\/a>\u00a0observed:<\/p>\n

Cook\u2019s legal battles are playing out against a broader struggle over the long-held political independence of the Federal Reserve. Trump and several of his officials, including Pulte, have attacked Powell in a months-long campaign to pressure the central bank into significantly cutting its benchmark interest rate, arguing it would stimulate the economy.<\/p><\/blockquote>\n

On Oct.1, the United States Supreme Court temporarily\u00a0blocked the attempt<\/a>\u00a0to remove Governor Cook by delaying a decision on a ruling from a lower court that allowed her to stay in her position until the high court hears oral arguments in the case in January.<\/p>\n

On Aug. 8, Fed Governor Adriana Kugler resigned, and in September, Trump pick Stephen Miran was confirmed as her replacement. The\u00a0Daily Rip observed<\/a>\u00a0that Cook\u2019s removal, alongside Kugler\u2019s sudden resignation, could give Trump a 4-to-3 board majority to push for lower interest rates, in order to ease the $37 trillion national debt\u2019s servicing costs.<\/p>\n

But if easing the national debt servicing costs is the goal, lowering interest rates won\u2019t do much to further it. The Fed has control only of the fed funds rate, which is short-term. Marketable securities make up the vast majority of the debt held by the public, and\u00a0most of those securities<\/a>\u00a0are notes and bonds with fixed interest rates and maturities ranging from two to 30 years. These existing obligations continue to accrue interest at their fixed higher rates until they mature.<\/p>\n

A More Effective Target: Interest on Reserves<\/strong><\/p>\n

While political reshuffling grabs headlines, the real target of the Administration\u2019s moves may be that little-known Fed policy called Interest on Reserves. So argues\u00a0an August 28 Heresy Financial podcast<\/a>, which observes that IOR costs taxpayers $186 billion annually by paying banks a hefty interest to hold their reserves at the Fed. By eliminating IOR, the Administration could not only save this $186 billion but would release the $3.3 trillion now sitting idle in reserve accounts to other investments, most likely Treasuries, where banks could get a comparable safe return. The result would be not only to restore Fed profits to the Treasury but to lower federal borrowing costs.<\/p>\n

The Fed says\u00a0it needs IOR<\/a>\u00a0as a tool to control short-term interest rates, which it needs to be able to do to control inflation. By paying substantial interest on reserves, the Fed ensures that banks don\u2019t flood markets with cash by over-lending, triggering price inflation. But the Fed managed rates through open market operations before 2008 without IOR, showing it is not essential; and it is a very costly tool.<\/p>\n

The Crushing Financial Burden of IOR\u00a0<\/strong><\/p>\n

The Federal Reserve\u00a0has paid interest<\/a>\u00a0on bank reserve balances since 2008. As of May 2025, the Fed was paying 4.4% on $3.3 trillion in reserves, totaling $186 billion annually. These payments are deducted from the Fed\u2019s earnings, which by law are returned to the U.S. Treasury after deducting the Fed\u2019s costs, reducing the federal deficit.<\/p>\n

In 2021, Fed remittances to the Treasury totaled $79 billion. In 2023,\u00a0high IOR costs led<\/a>\u00a0to Fed\u00a0losses<\/em>\u00a0of $114.3 billion. This not only halted remittances to the Treasury entirely, it created a net deficit to the Fed that will have to be repaid from future taxes to cover its costs. A\u00a0St. Louis Fed report<\/a>\u00a0said it could take years before the Fed is able to once again return profits to the government.<\/p>\n

As of the beginning of September, the national debt is at $37.4 trillion and\u00a0interest payments for FY2025 are at $933 billion<\/a>\u00a0\u2014 the third largest category of federal expenditure after Social Security and Medicare. Lost remittances force the Treasury to borrow more at higher rates, pushing 10-year Treasury yields up to\u00a04.2% as of September 26<\/a>. A\u00a0proposed bill to eliminate IOR<\/a>\u00a0estimates savings of $1.1 trillion over 10 years by restoring Fed profitability and remittances.<\/p>\n

IOR has other downsides besides loss of remittances to the Treasury. It incentivizes banks to park funds at the Fed, earning over 4% risk-free, rather than using their reserves to back riskier commercial and consumer loans. Since\u00a0bank lending is the source of the vast majority<\/a>\u00a0of the circulating money supply today, IOR reduces the money supply, constrains liquidity, and throttles lending to businesses and consumers.<\/p>\n

Before 2008, banks lent freely, and funds held in reserve accounts were minimal.\u00a0Reserves surged<\/a>\u00a0to $2.7 trillion by 2014 and remain high, reflecting substantially reduced lending.\u00a0Commercial and industrial loans grew<\/a>\u00a0only 2.1% annually from 2020 to 2024 compared to 5.6% pre-2008, starving small businesses of capital.<\/p>\n

A Subsidy for Big Banks at the Expense of Taxpayers<\/strong><\/p>\n

Critics of IOR argue<\/a>\u00a0that it is a subsidy for large banks, rewarding them for holding idle funds rather than fostering economic growth. Meanwhile, taxpayers face rising borrowing costs.\u00a0Credit card rates<\/a>\u00a0averaged over 25% and\u00a030-year fixed rate mortgages<\/a>\u00a0hit 6.3% in September.<\/p>\n

IOR, which is\u00a0now over 4%<\/a>, sets a floor on the fed funds rate \u2014 the rate at which banks lend to each other \u2014 since they won\u2019t lend for less than they can make at the Fed. It thus keeps borrowing costs high, contradicting the Fed\u2019s goals of maximum employment and stable prices. Ending IOR would force banks to either lend or invest in Treasuries, aligning their incentives with economic growth.<\/p>\n

Part 5 of a Cato Institute series called \u201cReforming the Federal Reserve<\/a>\u201d concludes:<\/p>\n

At its core, the IOR policy is a government subsidy to large financial institutions. Banks now have their own risk-free savings accounts, giving them returns that are hundreds of basis points higher than what regular consumers receive on their own deposits at the very same institutions. If that isn\u2019t bad enough, the billions that banks receive in interest payments have reduced their incentive to lend in the private market, reducing the cash available to regular Americans to borrow while flooding the banking system with trillions in reserves.<\/p>\n

\u2026 The Fed has disbursed billions in risk-free government payments to large banks.\u2026 This policy is economically costly, threatens the Fed\u2019s mandate to stabilize prices, and is unfair to everyday Americans.<\/p><\/blockquote>\n

Quantitative Easing: Another Fed Tool for Bank Rescue that Could Be Diverted to Public Investment<\/strong><\/p>\n

Eliminating IOR would produce substantial savings, but like lowering the fed funds rate, it would not fix the federal debt problem since it would not address the $10 trillion in annual debt rollovers or long-term debt. Making short-term debt cheaper could also encourage more government borrowing without curbing spending, worsening the debt cycle.<\/p>\n

A more effective way to fix the debt permanently would be to pay it, or at least some portion of it, with government-issued money. Quantitative easing (QE), in which the Fed creates new reserves to purchase assets, is another Fed tool that today has served the banks alone. But the precedent for Fed \u201cmoney-printing\u201d has been set, and if it can be done to save the banks, it can be done to save the public. Critics say this would inflate consumer prices, but Part II of this article will counter that objection with some very successful non-inflationary precedents.<\/p>\n

During \u201cQE1\u201d (2008-2010),\u00a0the Fed purchased<\/a>\u00a0$1.25 trillion in mortgage-backed securities (MBS) \u2014 many of them distressed or illiquid \u2014 directly from banks and government-sponsored entities. This removed toxic assets from bank balance sheets and transferred them to the public. As\u00a0Joseph Stiglitz observed<\/a>, \u201cWe socialized losses, even as we privatized gains.\u201d The Fed absorbed toxic assets and inflated asset prices to recapitalize Wall Street, while leaving homeowners and small businesses behind.<\/p>\n

In a September congressional hearing, Stephen Miran pointed to\u00a0a rarely discussed\u00a0third mandate<\/em><\/a>\u00a0of the Fed. Besides price stability and maximum employment, it is required to moderate long-term interest rates. Miran argued that this mandate offers a legal and strategic opening for QE to serve public investment rather than private speculation.<\/p>\n

But Even QE Can Provide No Federal Debt Relief Under IOR<\/strong><\/p>\n

Quantitative easing has periodically been proposed as a way to tackle the federal debt crisis. With\u00a0$9.2 trillion in Treasury debt maturing annually<\/a>, in four years the Fed could theoretically shift the whole $37 trillion debt onto its own books through QE and return the interest it earns on the bonds to the Treasury. The debt would still be there, but it would be an interest-free debt to a partner government agency, the Fed. Under current laws and policies, however, there are two obstacles to this solution:<\/p>\n

1.\u00a0The Primary Dealer Restriction<\/em>: The Fed is\u00a0not allowed to buy securities directly<\/a>\u00a0from the Treasury. It must buy from \u201cprimary dealers\u201d on the open market like everyone else; and these dealers (mostly very large banks<\/a>) park the funds they receive for the trade in their reserve accounts, on which the Fed pays IOR.<\/p>\n

2.\u00a0Net Loss from IOR<\/em>: As of May 2025, the Fed was paying 4.4% on reserves but\u00a0earning only around 3.3%<\/a>\u00a0on Treasury securities. So rather than returning the interest from the bonds to the Treasury, this QE maneuver would actually cause the government to\u00a0lose<\/em>\u00a0$101 billion annually on the $9.2 trillion in bonds ($9.2 trillion \u00d7 1.1% (4.4% \u2013 3.3%). The banks, not the Treasury, would reap the benefits.<\/p>\n

A Call for Reform<\/strong><\/p>\n

Changing these rules requires legal changes or a cooperative Fed board, which faces resistance from the banking lobby profiting from IOR\u2019s $186 billion windfall. The Fed has issued trillions of dollars in reserves to save the banks, its real constituents. Would it do that to save the government? Only if its interests were aligned, as they were in the 1930s and 1940s.<\/p>\n

Either the independence of the Fed needs to be curbed or the Treasury needs to issue money directly, as Abraham Lincoln did. As will be shown in Part II of this article, this solution has substantial successful precedent both in the U.S. and abroad; it need not create inflation, and it is the monetary \u201csecret sauce\u201d of our largest competitor, China. By directing central bank liquidity toward infrastructure and industrial policy, the People\u2019s Bank of China stabilizes prices, supports employment, and reduces long-term borrowing costs. The question is not whether QE\u00a0can<\/em>\u00a0serve the public, but whether the Fed will choose to wield its mandate for that purpose.<\/p>\n

Central banks must be accountable not just to their banking constituents but to Congress and the people they represent. If we\u2019re legalizing QE for Wall Street, then it\u2019s time to fund QE for Main Street.<\/p>\n

________________________________________<\/em><\/p>\n

\"\"<\/a> Ellen Brown is a member of the <\/em>TRANSCEND Network for Peace Development Environment<\/a>, an attorney, founder\/chairperson of the\u00a0<\/em>Public Banking Institute<\/a>, and author of thirteen books including\u00a0<\/em>Web of Debt<\/a>,\u00a0The Public Bank Solution<\/a>, and\u00a0<\/em>Banking on the People: Democratizing Money in the Digital Age<\/a>.\u00a0Her articles are at\u00a0<\/em>ellenbrown.com<\/em><\/a><\/p>\n

 <\/p>\n

Go to Original \u2013 ellenbrown.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

5 Oct 2025\u00a0–\u00a0The Fed\u2019s Hidden\u00a0Drain<\/p>\n","protected":false},"author":4,"featured_media":179118,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[40],"tags":[563,1982,562,70],"class_list":["post-304532","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-transcend-members","tag-debt","tag-economic-crisis","tag-finance","tag-usa"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/304532","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=304532"}],"version-history":[{"count":1,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/304532\/revisions"}],"predecessor-version":[{"id":304533,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/304532\/revisions\/304533"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media\/179118"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=304532"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=304532"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=304532"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}