|Fed Balance Sheet (July 7) - See below|
"Unlike 2010, there appears to be little latitude for a robust fiscal or monetary response to the weakening in leading economic measures. Not that we would view any of those responses - aside from facilitating debt restructuring - as promising in any event. Before contemplating a round of QE3, the hawks on the Fed are likely to ask what benefit QE2 provided to the real economy, aside from Fed sponsored speculation, market distortions, and commodity price inflation.
Moreover, as of Wednesday July 7, the Fed's consolidated balance sheet shows $2.87 trillion in assets, versus $51.7 billion in capital, for a leverage ratio that is now up to 55.6-to-1. This isn't getting any better, and is far beyond where Bear Stearns, Lehman, Fannie Mae or Freddie Mac were at just prior to their respective insolvencies. Of course, nobody is going to shut down the Fed just because it is approaching technical insolvency, but we ought to recognize that anytime interest rates rise, the interest being paid on Treasury debt is quietly being used to cover the Fed's capital losses."