I'm not sure I agree with that. The FRB *is a regulatory body* itself afterall ... member banks, in addition to buying Fed stock, agree to Fed oversight in order to be part of the organization. Not all banks are part of the Federal Reserve System. That being said, I believe that the FRB is accountable to its shareholders, and to the extent that it pays out most of its profits to the Treasury, there's quite a bit of transparency of their balance sheet.
> So it's a great place to hide things that, should their true
> value be exposed on a GAAP balance sheet, would require a
> writedown and decrease money supply.
I don't see where you're headed with this. By being the lender of last resort, they are freed from having to do things like play quarterly games. The Maiden Lane vehicles would never have worked if we had Just Another Bank. A Central Bank gets extra powers in exchange for the extra responsibility. I mean, that's sort of the whole point.
> As for the distinction between Fed and Treasury, let me
> understand: The Fed issues the legal tender and decides how
> much to create. The Treasury uses Fed notes to pay its debts.
> How are these things separate?
Those seem quite separate to me. In particular, if you go back to what you originally said -- that somehow the FRB was making loans that were backed by the full faith and credit of the US government -- I think the difference is clear.
I can use a concrete example: the Fed has been buying a lot of Agency debt lately. They are (now) guaranteed by the US Government. If those bonds default for some reason, who books the loss? Is it:
a) The Fed b) The Treasury c) It doesn't matter, they are the same
It seems you're saying (c), though the right answer is (b).
> If I decide to buy US debt, I am relying on the US to generate the
> revenue to pay the interest;
Yes.
> and I am relying on the Fed to uphold stable monetary policy so
> that the interest is repaid in units with reasonable purchasing power.
Well ... that's an ideal, not a promise.
> An investment in US debt requires both
> Fed and Treasury to support the asset.
Yes, I think I mentioned that they have complementary goals and charters.
> The Fed has willingly taken on bad assets ...
(your opinion)
> and it seems to me, that the impetus for investors to continue
> buying the debt is associated with the strength of the economy,
> Fed balance sheet aside.
There's a lot of good reasons to buy US treasuries; clearly having a strong economy isn't one of them these days :-)
> The Fed balance sheet such as it is, is sort of underwritten by US
> economic power--created by the US public.
I'm not sure what you mean by 'sort of' ... unless you're talking about some kind of conceptual underwriting as opposed to actual underwriting? I mean, sure: fractional banking is a puppet show.
/jordan