The perils of expanded balance-sheets

A CENTRAL BANK’S power stems from its ability to create reserves from thin air so as to buy assets or lend to borrowers. The use of the balance-sheet involves choices: which assets to buy, and how much. Central banks are guided by their legal mandates, using their clout to defuse risks to the financial system and meet their inflation targets. But their actions create winners and losers. After the financial crisis the Federal Reserve was castigated for bailing out Wall Street over Main Street. The ECB was attacked for being slow to act as a lender of last resort to the euro area’s heavily indebted southern members.