On 3/1/12, Tony Rolfe <mr.tony.rolfe at gmail.com> wrote:
> Perhaps it's nitpicking but because the Fed is a regulatory body,
> doesn't mean that it has the capacity (let alone inclination) to
> properly regulate itself. Having member banks, as a sort of form of
> large institutional ownership hardly seems to me an effective form of
> regulation--the reciprocal nature of the relationship suggests weak
> oversight (similar to the ratings agencies and CDOs).
>
> 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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