Bob Sherman on the Differences Between the 2008 and the 2019-20 Financial Crises
It has been just 12 years since the United States lived through its last financial crisis, the repercussions of which were much longer lasting than that. However, once again, the nation, along with the rest of the world, are finding themselves in yet another period of economic uncertainty. The COVID-19 pandemic essentially brought the world economy to a crashing halt. Mandatory lockdowns and business closures across the globe have led to an unprecedented drop in economic activity and has left us all facing yet another economic recession. Despite the fact that we are currently living through another financial crisis, it is worth noting that the characteristics of the 2019-20 crisis are far different than its 2008 counterpart.
Bob Sherman is a finance professor at the University of Connecticut. From the speed of market decline to the involvement of banks, he shares three key differences between the Great Recession and the current financial crisis.
The Speed of Market Decline
The COVID-19 pandemic is unprecedented in more ways than one. When it comes to the economy and financial crises in particular, Bob Sherman states that the speed of market decline was significantly different between the 2008 and the 2019-20 recession. The Great Recession occurred over a two-year period, from 2007 until 2009. It took approximately 18 months for major stock indexes to fall by 50%. This long, slow decline meant that investors left the stock market. In contrast, the current financial crisis happened practically overnight. In just one month, between February 19 and March 23, 2020, the S&P 500 Index fell by 34%. This quick decline, largely the opposite of what we saw in 2008, left many investors in a complete state of shock.
The Role of Banks
Banks were central to the 2008 financial crisis. It was a combination of mortgage lending to subprime borrowers and a securitization process that inflated bank profits, which led to a serious bubble in the housing market. In the more recent recession, banks are not to blame. This time, it was a global pandemic that spurred an economic recession. Mandatory lockdowns and business closures ultimately got us to where we are now. To compare the impact on economic activity of the two recessions, the lowest drop in economic activity was by 8.4% in the 2008 recession, but in 2020, a drop in economic activity skyrocketed to 30%. While banks are suffering along with the rest of the economy, they are better equipped to withstand a crisis owing to their previous experience in 2008. Bob Sherman claims that banks have a much better regulated financial system now and are more likely to be part of the solution than the problem in the current crisis.
Bob Sherman on the Role of the Federal Reserve
There’s no denying that the Federal Reserve has played a more proactive role in the 2019-20 financial crisis. Back in 2008, the federal government allowed Lehman Brothers to collapse. It also took many years for the government to provide fiscal stimulus to the economy in the form of spending and tax cuts. By comparison, the Federal Reserve acted much more quickly in response to the most recent crisis.
Shortly after the recession began, the Federal Reserve reduced federal funds rates to zero. It also established a program to purchase corporate bonds and the exchange traded funds that track them. There’s also been a significant difference in the stimulus packages offered. Over the course of the Obama and Bush administrations, a fiscal stimulus package of $941 billion was provided. Currently, lawmakers have already passed a $2 trillion stimulus package, which they did back in March, right when the pandemic began in the United States. This stimulus package was equal to $1,200 in stimulus payments per individual and it offered support in the form of financial aid to small businesses through the Paycheck Protection Program. Bob Sherman claims that this amount of stimulus has never been seen before in the United States and is a clear indicator that not only has the federal government learned from its past mistakes, but also that we are truly living in unprecedented times.
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