• FIC Hansraj

The Global Financial Crisis And COVID 19: A Comparison

Entrapped in the predicament that has befallen us it is only natural for us to draw a parallel to the last big quandary we braved. While some argue that the two are far different in nature, others favour the resemblance of these two catastrophes.

The Global Financial Crisis And COVID 19: A Comparison | FIC Hansraj
The Global Financial Crisis And COVID 19: A Comparison

The thread joining them together starts with the ubiquity of the crisis, it is everywhere. The coronavirus can be carried and spread by people even when they are asymptomatic, which makes it undetectable yet active and leads to problems in early detection. This is highly similar to the time when early detection of the defaults of subprime mortgages became nearly impossible due to them being embedded under the high-quality mortgages. The denial, underestimation, and unpreparedness for this virus and the financial crisis of 2008 are alike. Planners and analysts undermined the potential of the two and turned blindsided to how much these events could escalate. The ratings of the subprime mortgages given by several agencies were neglected and no one predicted a housing debacle. In a similar turn of events, China first denied the presence of any such virus and the US underestimated the gravity of the situation leading to a disastrous outcome. The spread of the problem from local to global also binds them together, as the virus that started in Wuhan led to a pandemic, while the US real estate market problem caused a downfall in the world economy. There also lies a concern regarding the political uncertainty that a global depression can spark. The 2008 financial crisis had led to a profound political stagnation and raised a block of anti-technocratic populist leaders, we can expect the Covid-19 crisis to lead to an even more extreme outcome.

The trail of differences to be highlighted goes way further. Starting with the speed of escalation while the global financial crisis was a slow-moving train wreck the COVID 19 has a drastic immediate effect. The fact that the economies were already low compared to the previous years in 2020 is also something that separates the two. The current scenario unlike the previous is not confined to any sector, it influences the economy as a whole has a major impact on the service trade including the small firms. It pertains to a demand shock in contrast to the financial liquidity shock at the time of the global crisis. This is mostly because the consumers have tightened their grips over their spending in lieu of quarantine and precautionary measures. The actions that we are taking to preserve our health even though essential is worsening the economic outlook. One of the major outcomes is unemployment as labour, transport, and travel i.e. the service sector has taken a severe blow. Currently, unemployment has fallen rapidly even crossing the benchmark 10.6%fall during the global financial crisis. A fiscal stimulus will be required to lessen the impact on the economy, as monetary policy changes would have but the minute impact on the current scenario.

However, a point to note is that both these significant events unleashed the dark side of globalisation, leading to painful consequences on top of human suffering. The ray of hope in this predicament is that our current downfall is caused by a biological factor and that since the cause has been identified, we would definitely be able to find a solution in the near future. The question though is how near is this achievement in the future, and how long would it take for us to recover from its impact on our economies.

Illustration by: Udeshay Teotia