Cash is a liability to the central bank which is offset by a corresponding amount of US Government debt. That is a what "full faith and credit" means. Solvency

Cash is a liability to the central bank which is offset by a corresponding amount of US Government debt. That is a what "full faith and credit" means. Solvency of the Federal Reserve is required to control the money supply and manage inflation. When the Federal Reserve wants to put cash into the system it buys debt and creates cash. When it wants to take money out of the system it sells the debt and retires the cash it receives. An insolvent central bank would cripple its ability to manage the money supply as it would never be able retire the cash for the defaulted asset because who would be willing (or required) to surrender their cash for the defaulted asset? What you are arguing is essentially that the central bank should start operating as an insurance company instead of a central bank. Acting as the insurer of last resort so to speak. That function has traditionally (and rightly) been carried by the Federal Government and having the Central Bank take that role would require a dramatic change in its charter.