With the current economy in shambles as Covid-19 cases have risen dramatically in the past few weeks, how does the current stock market crash compare to that of 2008? Both involve unprecedented events that led to global catastrophe, and they will leave hundreds of thousands of Americans jobless as entire industries face collapse. The Federal Reserve (Fed) has already cut interest rates to near-zero and unveiled stimulus packages as well as a new bond-buying program in an effort to calm markets, but much like 2008, stocks keep plunging as we dive deeper into this recession. However, fundamentally, both crashes are different and involve different circumstances that will shape the way the market will recover.
What Happened in 2008?
While ten years have gone by since perhaps the worst financial crisis since the Great Depression, many have already forgotten how damaging it truly was. It occurred at a time when the infrastructure of the banking systems in Europe and the United States was not yet fully developed, and it resulted from years of internal weakness that formed the core of the economy itself.
The financial industry suffered from a lack of regulation, and this permitted banks to make seemingly low-risk investments into a housing bubble that was rising in price. However, once the banks began to take advantage of these mortgages using false ratings and securities, the bubble popped rapidly, and what initially seemed to be a safe investment had already become exceedingly dangerous. As many Americans who had put mortgages on expensive new houses could not afford them, when they defaulted, banks were left with a lot of houses with no real demand for them.
This would lead to widespread layoffs in real estate, construction, and banking, as the banks had toxic balance sheets and were essentially frozen, unable to lend money or provide any liquidity to consumers. It took many years to shore up the backbone of the financial industry, and many laws and regulations had to be passed to truly fix the internal weaknesses which plagued the US economy.
What is Happening Right Now?
What is occurring today, however, is a completely external event that has caused unforeseen financial losses for countries with well-established financial systems. As a result, consumers, businesses and lenders are much more likely to bounce back when the pandemic does eventually end.
Additionally, unlike 2008’s effect on the totality of the market, the coronavirus has only targeted certain sectors, while others have remained relatively stable.
However, the reason why this event could be worse in some aspects is its unpredictability. In 2008, the event that occurred was catastrophic but there was a path to stabilization that reduced the panic experienced by the American people. With a global pandemic, however, no one knows how things will turn out.
“It’s closer to a natural disaster,” says Kathy Bostjancic, director of U.S. Macro Investors Services at Oxford Economics.
People fear what they have not yet experienced and with no models able to predict the outcome of this financial disaster, fund managers and investors are unable to make well-informed decisions. This has caused many to take money out of the stock market and will thus lead to a major decline for certain industries, especially aviation and oil.
Much like 2008, aggressive efforts have been taken to encourage spending, and the Fed has already cut rates by 50 basis points. This means that the interest rate for borrowing money has been slashed by half a percentage point, and in the future, a 100 basis point cut could be coming soon. Not only that, but the Fed plans to buy as much government-backed debt as needed and start aggressive programs to shore up businesses large and small.
“Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate,” the central bank said in a Monday morning statement.
Could the Crisis Today Surpass the Stock Market Crash of 2008?
Perhaps the greatest possibility that the economic crisis today surpasses that of 2008 is if the government maintains a laissez-faire attitude regarding the dangers that Covid-19 poses to the common people. While cases have died down in high-risk areas such as China due to draconian measures that force citizens to stay in their homes and essentially reduce non-familial contact to zero, in places like the United States, where such measures haven’t been implemented, it is difficult to contain increased outbreaks.
It will not be until the government reaches a point of desperation that its policies will become stricter, and with this, the financial markets should begin to recover. Until then, there is no light at the end of the tunnel and any hope of a quick V-shaped recovery will almost certainly be delayed.
Of course, the question at hand is which recession is worse? The one that derailed the financial and banking systems of the country and left millions in debt and poverty? Or the one that is still ongoing and has caused unprecedented drops in the stock market while cases of a global pandemic rise exponentially by the day.
Overall, while the current crisis is certainly significant and will have major implications many years into the future, it most likely will not surpass the losses caused by the 2008 recession. Rather than an external factor that has upset a relatively stable financial system, 2008 was the culmination of issues within a weak and flawed economic infrastructure that forced America to regulate the economy. As for the coronavirus, most speculate that while there is uncertainty, the recovery should be quick and efficient once the cases begin to die down, which it seems will occur in less than a year.
So, while it will certainly affect millions of Americans in the near future, those who experienced the financial meltdown in 2008 can breathe a sigh of relief that they most likely won’t have to go through the same struggle to nearly the same extent.
Featured image by stockinvestor.com
