Most of this incremental household debt found its way into the credit market in the form of securitization (RMBS, ABS). Historically, highly-rated securitizations were valued using in-house intrinsic-value models due to the absence of a secondary market for structured product (due to its opacity and complexity). This convention worked as long as structured product performed in accordance with expectations and credit losses were within the ranges suggested by their ratings.
This accounting change, imposed at the end of 2007, disregarded the absence of an efficient, liquid secondary market for hard-to-value complex securities. While some intrinsic-value models may have been over-optimistic, the futile and fictitious mark to market convention created massive paper losses which exceeded the earnings capacity and capital resources of the financial system, thus transforming a credit problem into an accounting-driven capital crisis.
The withdrawal of credit to the household and corporate sectors pushed the real economy into the sharpest and steepest recession in the postwar era, which further threatened the performance of the securitized product of the boom era.
The Fed increased its balance sheet by ~$2 trillion (still small in the context of $14.5 trillion GDP) and the Federal Government increased its liabilities by ~$2 trillion. The GSEs were kept afloat by capital from the government and securities purchases by the Fed.
Because the securitization market has not revived, not only is there no viable exit, it may prove necessary to grow the FRB/GSE balance sheet by another $1 trillion in 2010. There is no public discussion of this need. All eyes are on the exit.
The problem is, as I see it, is that he desires to (1) maintain FOMC consensus, which gives the irresponsible hawks a veto; and (2) retain respect and support for the Fed on Capitol Hill, Wall Street and abroad. The radical measures that Bernanke may be required to take threaten both of these goals.
It may be remembered that it took the total collapse of the US economy and financial system for the government to abandon the gold standard, the shibboleth of the day. Hopefullly, it will not require the collapse of Western civilisation to wean the FOMC from its death-wish embrace of "price stability".