balance sheets central banks they started to swell since 2008. When interest rates started to rise last year, many central banks reported losses. We were told that this is not a problem because central banks are not bound by normal accounting rules. However, relevant studies show that financial crises occur after periods of balance sheet ballooning. In addition, losses undermine the credibility and independence of the monetary authorities. Thus, they make their task of keeping inflation under control more difficult. In recent years, the typical central bank has combined Silicon Valley’s asset-liability mismatch with Lehman Brothers’ leverage and Enron’s balance sheet secrecy. The expansion of their balance sheets is unprecedented.

According to new research by Niall Ferguson and colleagues published by Stanford University’s Hoover Institution, central bank assets relative to GDP are several times the historical average and almost double the previous record during World War II. The Fed has $8.5 trillion in assets. and relies on just $42 billion in capital. Last year, the Federal Reserve posted losses for the first time since 1915, while central banks from Australia to Sweden are in a similar position. We are told that central banks are not ordinary banks. They exist to set monetary policy, not to make a profit or avoid a loss. Credit does not apply in their case. They do not have savers and therefore cannot be subject to panic runs. They never run out of cash, and in the recent past, many central banks have successfully operated with negative equity.

However, during the past year, interest rates have risen, causing turmoil in financial markets. At the same time, their inflated balance sheets hinder their efforts to curb inflation. Because central banks now pay interest on their assets, which are a form of short-term government debt, any increase in interest rates also increases the cost of government debt. If they have to sell securities, they will show losses. The former governor of the Bank of France, Jacques Larossière, emphasizes that “no one should be exempt from discipline and the duty to give an account, neither emperors, nor kings, nor central banks.”