The key similarity between the 2008 financial crisis and the financial crisis of 2020 is the uncertainty and fear of economic instability. However, the great economic recession of 2008 originated in the Real estate market of the US. Conversely, the 2020 world crisis erupted from a health crisis that originated in China.
Table of Contents
Financial Crisis 2020 vs. 2008: Comparison Table
| Base | Financial Crisis 2020 | Financial Crisis 2008 |
|---|---|---|
| Origin | 2020 crisis originated as a health crisis in Wuhan, China. | 2008 global financial crisis erupted from the US real estate market. |
| Nature | It is cyclic; first emerged as a supply shock and now turned into a demand crisis. | It was rooted in the US financial system and then covered the whole world. |
| Feds Interest Rate | The feds only had 160 basis points. | The government had a margin of 500 basis points. |
| Role of Banks | Banks are getting public guarantees to provide loans to companies/firms and solve the crisis. | Financial institutions did not have enough funds; they were part of the crisis. |
| Quantitative Easing | Within weeks, the money printed for relief packages is nearly 4 Trillion. | The US government rolled out a $700 billion bailout. |
| Recovery | IMF expects the world to recover from this crisis by 2021. | The Global Financial Crisis or the economic recession of 2008, lasted for 18 months. |
What Is The Financial Crisis 2020?
A financial crisis occurs when values of the financial assets experience a drop. See it this way; when the nominal values of financial assets rapidly fall in the economic market, the financial crisis occurs. Certain factors that increase the risk of a financial crisis include:
- Disruption in the intermediary financial services
- Major changes in the national credit volumes
- Government-funded liquidation and recapitalization on large scale
The global financial crisis we are facing today has its roots in the COVID-19 pandemic. The outbreak of the virus has forced the closure of many businesses worldwide, putting the economic activity at a standstill.
It started as a crisis in supply when many factories in China were closed, and now it has turned into a crisis of demand due to lockdown in many countries. Extended financial crises lead to an economic recession that continues to haunt the world economy for years, just like the Great Recession of 2008.
What Was The 2008 Economic Crisis?
A sudden turndown in the economy due to the financial crisis leads to poor performance in the economic sector. Gradually, the GDP begins to fall, and the price levels rise, the gap between the demand and supply cycle widens, and the unemployment rate skyrockets. The liquidity is lower, and so is the investment and trade.
Wondering why economic crises occur? Well, certain factors contribute to economic destruction, including:
- A sharp decline in the value of stocks due to unexpected events
- Mismatch in the asset-liability of financial institutions
- Deception; mishandling of funds at a large scale
The 2008 economic crisis sparked due to the downturn in the US real estate market when the Lehman Brothers declared bankruptcy. The real estate bubble resulted in mistrust and lack of confidence across the global financial system. The unsustainable debt levels amid the lack of credit quality and other financial imbalances caused the world financial system to collapse. It impacted the lives of the people and jolted the world economy in entirety.
Key Similarities Between Financial Crisis 2020 and The Global Financial Crisis of 2008
While the country is under lockdown and the economy is tripping, financial experts and economic pundits are comparing the current financial crisis to the global financial crisis that hit the US, and eventually, the whole world in 2008. Let’s have a look at the key similarities between the two crises.
A Cloud Of Uncertainty Is Weighing
Both crises emerged suddenly and spread in the whole world in a matter of a few days. The common underlying factor between 2008 and 2020 crisis is the cloud of uncertainty; these are non-quantifiable risks.
Experts could not identify the probability of the economic recession of 2008 and its impact on the world. The real estate bubble, the loans granted to the US citizens, and the financial imbalances led to the economic disaster.
The same is the situation today, as a cloud of uncertainty is weighing on the world economies. Many countries around the world are under lockdown, and the international financial ties are freezing. The indexes from the IMF show that the uncertainty, panic, or fear is at its peak worldwide.
There Is A Drop In The S&P Index
Several stock exchanges suffered a drop in the market shares after both crises due to the over-evaluation of the markets. The ratio between the price and earning based on the S&P index was above 30 in both 2008 and 2020; the average price to earnings ratio is seventeen since 1881.
In the first week of April, the ratio dropped to twenty-three, and it might drop further as markets first try to adjust and then react. While we don’t have the exact figures to compare, but even if the stock exchange bounces back, the next financial crisis is inevitable.
Public Authorities Have Made A Comeback
The spillover effects of the Global Financial Crisis not only changed the world economy but also brought in G-SIB – Global Systematic Important Banks. The global pandemic of 2020 has also revealed that numerous world economies are dependent on some inputs that are mainly produced in other countries; thus, the crisis is jeopardizing the sovereignty of “mature” economies.
Additionally, the public authorities are making a comeback with a call for better economic policies and regulations to provide fiscal and monetary support.
Key Differences Between The Financial Crisis of 2007 2008 and The Financial Crisis 2020
Now, let’s draw the key differences between the financial crisis of 2007-2008 and 2020. Both Have Different Origin.
What Caused The 2008 Financial Crisis?
The 2008 crisis emerged from the downturn in the US real estate market and bankruptcy of Lehman Brothers. The systematic recession first hit the financial system, which rose from unsustainable debts granted while there was a lack of credit quality. In 2008-2009, on average, nearly 750,000 people were losing their jobs per month.
What Is The Cause Of The 2020 Crisis?
The financial challenges of the 2020 crisis are cyclic; it is affecting both the supply and demand cycle. Since no major economic activity is taking place around the world, there is uncertainty. The crisis first emerged as a supply-shock in China, and then spread all over as China exports many goods around the world. After the outbreak of the virus, the crisis of demand developed as the world is under lockdown. The trade sector, tourism industry, and financial sectors – all are experiencing the effects.
Lower Margin of Feds Interest Rate
The Federal government had a margin of 500 basis points in the 2008 recession to lower interest rates. The feds used the margin to revive the economy and lowered the fund rates from 5% to almost zero. In case you do not know, the feds use this method to sustain the economy. The lower the rate, the less expensive it is to borrow money. However, this year, the feds only had 160 basis points, which they have lowered already.
The process of Economic Crisis 2020 and 2008
Currently, the lockdown in different parts of the world is voluntary to flatten the curve. European governments are favoring subsidized part-time work over firing employees in huge numbers to lower the risk of bankruptcies and productive capital loss.
In 2008, the main focus was to revive finances to avoid sudden economic death. Financial institutions did not have enough funds, and they emerged as part of the problem. Today, banks are getting public guarantees to provide loans to companies/firms and solve the crisis.
The Difference in Quantitative Easing
It is a monetary policy that involves printing money to stimulate the economic cycle. Banks provide loans (this printed money) at a fixed interest rate. In 2008, only the predefined firms and banks benefitted from the policy. George Bush signed a $700 billion bailout to help the economy survive.
The feds approved a 60 Billion quantitative easing program in the second half of 2019, anticipating an economic crisis. But the COVID-19 pushed the US government to inject more money, and the government announced $700 Billion initially, including 1.5 Trillion to banks. Within weeks, the government has signed relief packages worth trillions.
Impact on the Oil Industry
The US crude oil industry is witnessing a historical fall, with prices dropping below $0. It has no room to store crude barrels as the demand has plummeted. The negative prices or even $20 per barrel could force almost 500 oil exploration and production companies to declare bankruptcy by 2021.
During the 2008 recession, the oil industry was losing 1 million barrels every day. It was a demand shock for which inventories were built. But, the 2020 crisis is cyclic, and it is leading the world to the 2020 economic crisis.
Is the Economic Crisis Coming Soon?
According to Bloomberg’s Economic Model, there are 53% chances of the US to witness a recession within the next 12 months. It is the highest risk since the 2008 economic crisis, which lasted for 18 months. So, when is the next economic crisis?
Well, Goldman Sachs has forecasted 0% economic growth in the first quarter and – 5% for the second quarter in the US. It will lead to debt-deflation, loss of millions of jobs, and a sharp contraction in international trade.
According to Kristalina Georgieva, the MD of IMF, the outlook for economic growth amid the global pandemic is negative. It will trigger an economic crisis worse than the global recession of 2008. The IMF predicts that the global GDP rate would fall below 3% this year compared to 2019.
Financial Crisis 2020 vs. 2008: Comparison Chart
Comparison Video
Conclusion
While there are a few similarities between the 2008 and 2020 financial crisis, there are more differences. From origin to nature to process, the 2020 crisis is appearing to be more destructive. With the closure of industries across the world, the economic cycle is at a standstill. Once we get rid of the COVID-19, only then will we have a clear picture of economic loss so that we can draw a fact-based comparison between the two crises.
References
- https://www.nber.org/cycles.html
- https://twitter.com/EDNewsChina/status/1239412059948765184
- https://www.bloomberg.com/news/articles/2020-03-10/chaos-of-2020-can-t-match-2008-but-the-gut-punch-feels-familiar
- https://www.reuters.com/article/us-health-coronavirus-imf/imf-sees-pandemic-causing-global-recession-in-2020-recovery-in-2021-idUSKBN21A33O
- https://foreignpolicy.com/2020/03/18/coronavirus-economic-crash-2008-financial-crisis-worse/
Image Courtesy
- Photo by Obi Onyeador on Unsplash
- Photo by Rick Tap on Unsplash
