While making the best efforts to capture the extent of banks’ asset degradation, policymakers should communicate the importance of financial stability to taxpayers so that they become more receptive to the needed policy steps, however unpopular they might be.
To sum up, I spoke about four key elements of financial crisis management: 1) ample liquidity provisions, 2) support for credit market functioning, 3) macroeconomic stimulus, and 4) injections of public capital and elimination of balance sheet uncertainties. Without effective policy measures on these fronts, the economy will deteriorate much faster and deeper. But we need to be aware that policymakers are not omnipotent.