Kenneth Rogoff writes that central banks such as the US Federal Reserve, the Bank of England and the European Central Bank are over-exposed as they have tried to absorb the dodgy credit of the banks that should have been allowed to fail. Rogoff notes that central banks can fix their balance sheets courtesy of having the backing capital of taxpayers and the patience of governments that rarely fail:

But history suggests that fixing a central bank's balance sheet is never pleasant. Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalisation by taxpayers. Both solutions are extremely traumatic.

Rogoff asks why taxpayers should foot the bill and save banks when the financial sector has become used to high profits and executive bonuses through what is fiscally irresponsible behaviour.

This argument is all the more forceful if central banks turn to the "inflation tax", which falls disproportionately on the poor, who have less means to protect themselves from price increases that undermine the value of their savings.

The policies of the central banks amount to public subsidy of the financial industry.