Is COVID-19 GFC version 2 or something more?

April 7, 2020
Editor(s): Jiamin Fang
Writer(s): Huiqun Wang, Nuoya Liu, Richard Yuan

As COVID-19 advances from a regional crisis to a global pandemic, we’re witnessing increasing uncertainties in global markets that are somewhat reminiscent of the Global Financial Crisis (also known as the GFC) in 2008. Though the two crises have different triggers, their outcomes have surprisingly shown many commonalities.

Up to the point of writing, many countries around the world have declared states of emergency and adopted measures such as lockdowns and mandatory social distancing. The trigger of the financial and economic turmoil we’re going through is undoubtedly this global health crisis, which differs from that of the GFC.  Hearkening back to the 2007-2008 period, the GFC started in 2007 when the U.S. subprime mortgage market depreciated. In March 2008, investors sold off their shares of the investment bank Bear Stearns because it had too many toxic assets and the situation eventually evolved into an international banking crisis when the investment bank Lehman Brothers collapsed on 15th September 2018.

Despite the different triggers, both the COVID-19 and the GFC have seen huge stock market plummets. The stock market crash during the GFC occurred when the Dow Jones Industrial Average fell from 14,164.43 on 9th October 2007 to 6,443.27 on 6th March 2009, a plunge of 54% in less than 18 months. Similarly, after reaching an all-time high of nearly 30,000 points in mid-February, 2020, the Dow Jones Industrial Average plummeted by 35% (equivalent to over 9,0000 points) over a 1-month period. From 24th to 28th February, the largest weekly decline since the GFC was reported in the stock market, and the fusing mechanism was triggered four times in the U.S. stock market: on 9th, 12th, 16th, and 18th March respectively. Both the time back in 2008 and the current time period have seen turbulent markets and panicked investors, and experts are suggesting that the current U.S. stock market crash is not yet over.

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(retrieved from “The Unprecedented Stock Market Reaction to COVID-19”)

The current detriments felt in the macroeconomy are also comparable to that during the GFC, with unemployment rising and prices for products or services being uncertain and businesses struggling to react.

Unemployment, one of the most concerning issues in our macroeconomy, provides our first point of comparison between the COVID-19 crisis and the GFC. Up till present, the unemployment in the US has risen from a near 50-year low of 3.6% in October 2019 to 4.4% in March 2020. In contrast, the unemployment rate in December 2007 was around 5%, and this number grew to 10% in October 2009 as an aftermath of the GFC. It might seem at first glance that the GFC had a greater impact on the rate of unemployment, but future projections suggest otherwise. The Fed’s St. Louis district made the projection that the U.S. could have 47 million people lose their jobs as a result of the effects of COVID-19, which would give rise to a 32% unemployment rate.

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Despite the similarities currently found in the unemployment figures during the two time periods, the differing nature of the two events ultimately points to different underlying causes of the rise in unemployment. The drastic rise in unemployment resulting from the coronavirus boils down to the enforced health regulations by governments and decreased demand by individuals under self-quarantine. In the US, 66.8 million sales, production, food preparation, and services workers are at risk of losing their jobs. In contrast, the GFC created unemployment due to banks impacted by a large number of mortgage and loan defaults; this, in turn, affected the number of issued loans, which meant that businesses didn’t have the funds to expand or grow economically. As a result, they had to cut costs to maintain profitability, again leading to unemployment of the self-employed.

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Fluctuations in prices in the macroeconomy is another phenomenon observed in both the GFC and the current coronavirus situation. Due to the panic buying of essentials such as fruits and vegetables amid the COVID-19 crisis, insufficient supply to meet the rising demand has induced supermarkets and other food suppliers to raise the prices charged for these goods. Opportunistic price gouging in relation to health essentials – face masks, hand sanitizer, and medical alcohol – has also led to absurd prices: for instance, some prices have been advertised at $200 for 10 masks in the US. Likewise, pricing during the GFC also experienced large swings. For instance, in 2008, prices for Crude oil decreased from $150 to about $35 in a few months. The fall was ultimately created by decreasing demand for oil and lower earnings, leading to layoffs and a decline in incomes. This figure eventually rebounded during 2009-2014 as a result of the aggressive stimulus packages employed by governments to combat the financial crisis.

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Apart from the negative stock market reactions and deteriorating macroeconomic conditions, government responses during the GFC and the coronavirus also have some similarities, as well as differences.

During the 2008 financial crisis where lenders were at the center of the issue, much of the regulatory measures and bailout plans were built around bank solvency, e.g. the Dodd-Frank law, while the current economic recession resulting from the coronavirus threats to extend to all corners of the economy, including global supply chains. Hence, as compared to the $787 billion (later raised to $813 billion) American Recovery and Reinvestment Act (ARRA), aka. “stimulus package of 2009”, the current coronavirus stimulus bill exceeds its 2008 counterpart greatly in size ($2 trillion) and incorporates a wider range of aspects that even extends to a federally mandated paid leave benefit for the first time in history. Additional efforts have also been made in tackling this unprecedented public health crisis, including funds for front-line federal agencies, e.g. the Department of Health and Human Services.

While the first two pieces of legislation regarding basic funding of operations and paid leave are addressed more specifically to the pandemic, the battle over the last package of the bill, a rather 2008-styled kind of bailout (or so-called “slush fund” by Democrats), seems to be largely reshaped by the last 2008 financial crisis. That is, as the administration came forward with a trillion-dollar proposal that involves large-sized of bailouts for distressed businesses alongside loans to prop up big corporations, concerns arose with memories of the last time such quick and aggressive set of moves had taken place. Among the moves was the controversial $700-billion Trouble Asset Relief Program (TARP) introduced in 2008 – a package that prioritized big businesses despite many of them being in fact responsible for the meltdown. This “Wall Street Package” indeed provoked a great deal of discontent among the pubic and eventually resulted in the Tea Party protests throughout the US. With this lesson in mind, both sides of the ideological spectrum each became worried about the public reactions in case they made the wrong decision. Democrats, in particular, went strongly against this similar sort of giveaway with little strings attached, urging for more oversight requirements that would prevent companies from taking unfair advantage of government aid.

In spite of this massive $2 trillion coronavirus stimulus bill being signed into law on Friday, the 27th of March, there remain great uncertainties regarding how long this bill will last the economy, on top of how long it will take for the economy to adjust itself back to the right track. This uncertainty is also accompanied by the fact that notwithstanding stronger balance sheets for banks, the governments and central banks are not necessarily in a better position to tackle such economic recession as compared to 2008, especially considering the historically-low interest rate and huge amounts of national debt that are already present in many countries. Additional challenges also occur as the nature of today’s unemployment implies that liquidity itself is not going to solve the problem for people living paycheck to paycheck now.


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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Jiamin Fang
Huiqun Wang
Nuoya Liu
Richard Yuan