Ted Cruz Stumbles on a Source of Monetary Madness
Talk about the right debate for the wrong reason. A relatively obscure bit of financial regulation has become a projectile in the Capitol Hill food fight over a five-course budget bill. Alas, the thrower of this missile is missing the target.
At issue is the central bank's practice of paying interest to commercial banks on the reserve balances they deposit at the Federal Reserve. Sen. Ted Cruz (R., Texas) tried to launch a debate about this earlier in June when he suggested that if Congress barred these interest payments in its budget bill, it would save the government $1 trillion over 10 years.
Many voters might be surprised to discover the Fed is making such large payments to banks. When Congress in 2006 authorized the central bank to pay interest on reserve balances as of 2011, it seemed like an academic matter. The theory was that to satisfy regulatory reserve requirements, banks must forgo the income they otherwise would earn from that capital. That lost revenue constitutes a form of tax, and the Fed could soften the blow by paying interest on those reserve balances.
The stakes appeared low. Before the 2007-08 panic, reserve balances tended to be relatively small, and one could argue that the 'tax' was a fair price for banks to pay for access to Fed support in times of trouble.
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