What happens to Fed's balance sheet when its asset shrink in value? I noticed that Fed's balance sheet is special because I do not see any O.E. category (correct me if I am wrong). Suppsoe Fed's subprime MBS shrink in vlaue, its asset is decreased, but its liability doesn't (correct me if I am wrong), so it has an inbalance between A and L. If no O.E. is there, how can this be?
Also, Prof. Robert Shiller's "The Subprime Solution" says "if losses on collateral [during the crisis] mean that there are not enough funds to cover the defaulted loans, this will be reflected by the Fed paying less to the federal government, hence ultimately higher taxes for individuals." What does Prof. Shiller mean when he says not enough funds to cover the the defaulted loans and what does he mean by funds? What funds exactly? I mean, Fed has the ability to create reserve so how can there be not enough funds? One last question is why is the Fed paying the federal governemnt? I have never heard of Fed needing to pay the governemnt, shouldn't it be the governemnt pay the Fed due to the marturing of the T-bills and etc?