But this policy strategy may be difficult to pursue in a situation in which banks’ propensity to absorb central bank liquidity is muted. 2. The short-term crisis response  Does this mean that, in the dark-grey zone of intersection between the two cycles, policy is left impotent? The answer is: absolutely no.
But the complexities and risks that I tried to describe require a well-designed, multidimensional and consistent policy response. First and foremost, what’s needed is a thorough and transparent identification of risks on bank balance sheets and a robust reconstruction of equity.