I don't know of instances where Treasury attempts to rein in Fed activity in recent years. Are there cases like this?
So, if the Fed doesn't promise stable monetary policy, then are you saying that investors in Treasuries don't expect it? The economy being strong/powerful/... is an ingredient for having a stable monetary policy, but a Fed commitment to this ideology is essential too, no? Or is the Fed powerless relative to the economy in stabilizing dollar PP?
I agree that economic strength alone doesn't account for the reserve status of USD; the entire political/military/size/historical context contributes. This gives the Fed the leeway to do something like QE. Perhaps I'm wrong about this, but I think an emerging economy would have more trouble undertaking such QE---capital devoted to national debt would take a dim view of such activity.
And yes, I mean a sort of conceptual underwriting. The risk portion of the Treasury investment is tied to what is not known absolutely but can be determined by examining the relationships.
On 2/29/12, Jordan Hayes <jmhayes at j-o-r-d-a-n.com> wrote:
>> Although it could technically happen, there is no market
>> in Fed shares to demand transparency, nor auditors, nor
>> regulatory oversight.
>
> 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
>
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