The Federal Reserve’s balance sheet has nearly tripled, including about $ trillion of new mortgage-related securities, matched by a rise in excess reserve balances. Yet, the Federal Reserve’s most significant asset, like many other central banks, is not on its swollen balance sheet. Neither can it be found in the lengthy footnotes of its audited financial statements.
While we do not think that there would be any significant financial sector fragility as a direct result of this increased debt even if house prices were to fall in the near term, we fear that there could still be significant general economic fall out if the economy is subject to some other shock, mainly because household consumption could retreat quite quickly.