Context: Going by the IMF noting, the global economy is in a more intense and more extensive recession that far outweighs the Great Recession of the Global Financial Crisis of 2008.
GFC and CFC: A comparison
Critical differences between GFC and CFC
Global Financial Crisis
Corona Financial Crisis
Origin and Transmission
- The GFC originated internally in the financial sector as banks and financial intermediaries were the main sufferers.
- People lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped.
- The crisis, which originated in the financial sector, spread to the real economy.
Implication for Crisis Resolution
- The central challenge in the resolution of the GFC was to rescue and rehabilitation of banks and other financial institutions.
- Once the financial sector was on track , repair of the real economy fell in place.
- Demand came back, supply resumed and growth picked up.
- The CFC came from outside the economic system.
- As the pandemic spread, the first impact came by way of a supply shock as China-centred global supply chains broke down.
- And then as countries imposed lockdowns and economies shut down, demand slumped.
- The ensuing distress in the real economy led to distress in the financial system.
Implication for Crisis Resolution
- The central challenge in the resolution of the CFC is to beat the pandemic, with the help of science.
- There will be a resolution in both the real and financial economies only when the public confidence restores regarding the control of pandemic.
- Meanwhile, fiscal stimulus packages and central banks with monetary stimulus packages are just holding operations till the central problem is resolved.
Asymmetry of Solutions
- For the resolution of the GFC, restoring financial stability in the US was necessary for restoration of financial stability everywhere.
- It also means that no country was safe until the US was safe, and once the US financial system became stable, financial systems everywhere became stable.
- In the CFC, every country needs to control the pandemic within its borders.
- In other words, rich countries are not safe until poor countries are safe too.
- And no country is safe until every country is safe.
Synergy in Policy interventions
- During the resolution of the GFC, solutions in the financial sector and in the real economy reinforced each other.
- For instance, to mitigate the crisis, the RBI cut rates to stabilise the financial system and intervened in the forex market to stabilise the rupee.
- Meanwhile, the government extended special concessions for housing and real estate sectors to provide stimulus in the real economy.
- There was synergy in these actions.
- In managing the challenge of the CFC, there is a palpable tension between the various sets of policy actions.
- The effort to contain the pandemic is aggravating the challenges in both the real economy and the financial sector.
- The more stringent the lockdown to save lives, the more extensive the loss of livelihoods.
- Managing this tension is by far the biggest dilemma for governments battling the crisis.
- The Global was a misnomer actually as it did not affect all countries equally.
- China was less affected even as all rich countries were in a financial meltdown.
- In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.
- The present crisis grips all rich and big economies and there is not a single large economy to keep the rest of the world afloat.
Lessons learnt from both crises
- The GFC and CFC are similar in one respect; they both teach the world life-enhancing lessons.
- The GFC forcefully reminded us that greed and avarice will only bring tears in the end.
- The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.
- If pandemics are going to be more frequent, as suspected, then it calls for a more enforceable global protocol on early warning and information sharing.
Image Source: The Indian Express