David Malpass, who served as President Trump’s Under Secretary of the Treasury for International Affairs during his first term and later as president of the World Bank, warned again this week that the Federal Reserve, which has “lost a trillion dollars,” is now operating like “a giant hedge fund.”
Malpass told CNBC’s Squawk Box: “The Fed basically has become now just a giant hedge fund. It’s lost a trillion dollars, you know, and counting. It’s gonna be a gigantic loss. What it does is borrow money at 5.4 percent from banks, and then dumps it into government bonds. So think what that trade does; that causes the government to think that it’s better off than it is.” Malpass added that “it endangers the dollar.”
A former World Bank president warns that the Federal Reserve has lost over a trillion dollars, essentially operating as a massive hedge fund for the wealthy.
By borrowing from banks at 5.4% interest to buy Govt. bonds, the Fed artificially masks the true severity of Govt. debt. pic.twitter.com/1PVWGeWJwk
— David Rogers Webb (@DavidRogersW) July 4, 2026
When host Joe Kernen asked, “Instead of the Fed having such large balances, wouldn’t a private sector, starting businesses and risking capital and bringing returns and adding to growth, wouldn’t all that money be better if it wasn’t with the Fed?”
Malpass replied: “That’s right, we’re depending on private equity. So as the banks get squeezed out because they’re lending so much to the Fed, it’s literally a floating rate loan from banks to the Federal Reserve so it can buy government bonds. So if that were freed up, that would allow the banks to at least consider small business loans and inventory loans, the kind of things that help the economy grow.”
[NOTE: Malpass is a supporter of Trump’s newly appointed Fed Chair, Kevin Warsh, whom he believes should shrink the Fed’s balance sheet to boost economic growth. In June, Malpass wrote The Wall Street Journal op-ed, “Trump Is Right: The Fed’s Economic Models Punish Growth.”]
MAGA supporters are responding to the interview with frustration. President Trump’s former National Security Advisor Mike Flynn replied: “Again, why do we pay any taxes if all that happens with our money is that it gets ripped off by a small group of elites?”
Former West Virginia State Delegate Derrick Evans, who in 2022 pleaded guilty to a felony charge of civil disorder for his participation in the January 6 attack against the U.S. Capitol, replied to Flynn, “Exactly.”
In an assessment of the current Fed situation, JPMorgan underscores the fact that “while the Fed holds a substantial $4.4 trillion in Treasuries today, this represents 14% of federal debt in the hands of the public which is actually lower than the Fed share of federal debt 20 years ago.”
Still, the bank contends “the $2 trillion the Fed holds in mortgage-backed securities represents an implicit subsidy of home loans relative to all other forms of borrowing in the private sector. This is surely sub-optimal, since subsidizing education, R&D and business fixed investment would provide better gains in productivity and living standards in the long run.”
[NOTE: Prior to the 2006 congressional authorization allowing the Fed to pay interest on reserves, which had major implications especially after the Global financial crisis of 2008, “the Fed made a healthy profit on its balance sheet, since it paid no interest on its largest liabilities and earned interest on its Treasury portfolio,” as JPMorgan succinctly explains.]