I need to do some thinking out loud. The following may be a bit stream of consciousness, but will hopefully be useful.
The Fed in theory can only buy outright US Treasury Notes, and post-1980, foreign bonds, or bonds backed by foreign governments, which is a large grey area, which patently includes foreign currency like the euro–a unit of value backed by the EU–and seemingly investments in the IMF and World Bank.
Now, that last is an interesting area. Neither actually reports to a government. It is basically a bankers club which was birthed with taxpayer money, and gone on its merry way. But patently we pay into the IMF. We Americans are paying for a large share of the EU bailouts, via the IMF.
How does the purchase of Treasury Notes create money, though? Say I am a bank. I buy $10 worth of Treasury bonds. That $10 goes to the government, and right back out into circulation via government spending. The Federal Government is a voracious creature, which can easily suck up and spend every dollar given it. That $10 existed when I spent it, in exchange for a security that will pay me over time some amount of interest.
Yet when the Fed buys the Treasury note (the precise term may be bond, but basically we are talking about a piece of paper stipulating a claim on future revenue of the United States govt, which is to say future taxation) it creates another $10. Thus now $20 are in circulation. This is how Open Market Operations create inflation.
But the Fed also seems able to abuse at will the Discount Window. They can apparently decide to extend the term of the loans at will. They did this in 2008 and 2009, and are probably doing it today. They created something called the Term Auction Facility, by means of which they can offer 1 to 3 month loans, seemingly to anyone, and certainly including foreign banks. Since such loans would be renewable, this is a de facto ability to “lend”–which is to say create–any amount of money and give it to anyone. I have missed this point up to now. I can now see no limits on their ability to create money and disburse it to anyone.
This is particularly bad since they can collaterize such loans, which is to say stake a claim on a car, house, company, or nation, perhaps via the IMF, perhaps directly. And if they “repossess”, say, a bank, what happens? Who actually gets it?
Who, really, IS the Federal Reserve? They have their own buildings, but they are “owned” by member banks. If the Fed makes a loan to some obscure bank in, say, Asia, and the bank folds, do they get a claim on the assets of that bank? Its remaining loan portfolio? Does that go to a member bank, or does the Fed go into the business of owning foreclosed homes and office buildings? These are interesting questions, for which I have no answer.
And when the Fed buys up Treasury Notes, they buy them from anyone. They may well be buying up Chinese held Treasury notes. The Chinese government will then have put money into circulation here via our government spending, but will keep the money the Fed gives it, to be reinvested in China. We may, in fact, be helping the Chinese reduce their stake in US bonds. We don’t know. Bernanke announced the bond purchases, but how will we really know where the money goes?