If the panic of the next week of October 2008 worsens, governments have to be ready to stop it using auditing, recapitalisation, and liquidation. A stopgap stabilisation plan is always to guarantee all banks’ short-term liabilities, audit their assets, and tidy up the mess.
We are in a midst of a banking panic due to concern over the grade of bank assets and the adequacy of bank capital. Interbank lending has stopped and lending to non-banks is grinding to a halt. We are in need of intermediaries to begin with functioning again in order to avoid a deep recession.