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.

Affected nations

  • 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.

Source: https://indianexpress.com/article/opinion/columns/coronavirus-india-economy-6411861/

Image Source: The Indian Express