Massive wealth destruction, combined with global financial chaos, would pose a challenge to monetary policy-makers worldwide. Central banks would be tasked with preventing deflation, implying a major round of quantitative easing. But since banks are the transmission mechanism for monetary stimulus, this presupposes functioning banking systems. Each country would need to restore confidence in its banks’ solvency, which would most likely require a blanket bank guarantee and a recapitalization scheme (such as TARP).
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