While we’re still in the thick of this thing, many say that Covid-19 will cause a deeper and more severe recession than the Great Recession.
Economists predict that this coronavirus-caused global recession — known as the Great Pandemic — could only expect a recovery by late 2022 when a vaccine is widely available. However, if there’s another breakout of a new kind of virus strand, things could get even worse.
Although every recession is unique in its causes and effects, they can be compared to certain degrees for their similarities and differences.
A financial mess vs. a health mess
For starters, the Great Recession (2007-2009) was rooted in the financial system, while a sudden health crisis brought on the Great Pandemic of 2020. “The Great Recession was a result of financial imbalances — starting primarily in the housing sector,” said Louise Sheiner of the Brookings Institution. “This one is from a totally external factor, the coronavirus disease (COVID-19).”
According to the World Economic Forum, the US had engaged in serial social engineering to extend home loans to people who traditionally would not have qualified for them, causing housing prices and household debt ratios to rise to unsustainable levels. That led to the subsequent decline in housing prices, a rise in foreclosures, along with a devastating level of unemployment, resulting in the third major recession of the post-war era.
In contrast, the current recession stemmed from a health crisis, which is more like a natural disaster due to its far-reaching and unexpected economic repercussions. We can then say that the Great recession was nebulous and slow when it came on, rather than concrete and abrupt like the Great Pandemic we are currently in.
The Great Recession was all about unsustainable debt levels and a lack of credit quality for many assets that were unfamiliar to investors. When Lehman Brothers went bankrupt, it sparked mistrust across the entire financial system worldwide. This on top of a variety of imbalances that accumulated at the same time worldwide as a result of a real estate and financing bubble.
Simultaneously there was an increased level of business, household debt, and excessive leveraging in considerable portions of the financial system. When these imbalances could no longer be sustained, the economy suddenly stopped. This caused many debt-laden companies and financial institutions to go bankrupt, compounded by a lot of households who could no longer pay their bills.
In turn, the COVID recession brought on unprecedented lockdown measures that put an end to all in-person and non-essential business. This led to a rapid increase in unemployment, high levels of uncertainty about recovery prospects, online-only shopping, and an increase in personal savings.
Unemployment, then and now
The rates of unemployment were at a historic low before Covid-19 struck. Inflation was under control, and household debt burdens were far lower than before the Great Recession. Corporate debt was up, but servicing costs were manageable. The World Economic Forum reported that the Fed had less room to lower rates, and its balance sheet had swollen to roughly $4 trillion.
Under President Donald Trump, federal deficits and debt remained massive by prosperous peacetime standards.
Many predict that this crisis’s unemployment rates will be higher than the reported numbers since it doesn’t consider workers who cannot file claims.
A Forbes article explained that 8.6 million jobs were lost in total during that entire Great Recession. In April 2020, the magazine reported that more than 20 million jobs disappeared in March alone. During the Great Recession, the highest that unemployment rate ever climbed was 10% in October 2009; the unemployment rate for April registered at 14.7%
Today’s recession: bigger stimulus packages and better bank conditions
During the Great Recession, two stimulus packages worth $700 billion and nearly $800 billion (under Bush and Obama’s terms) were passed in 2008 and 2009. This eventually led to those controversial bank bailouts. In comparison, during the Great Pandemic so far, Congress has authorized close to $3 trillion in rescue spending to cushion the virus’s blow, with more said to follow.
In the last recession, banks were the culprits of the mayhem. But in the current crisis, though banks are suffering from a global economic decline like everyone else is, CNBC reports that the institutions are better equipped to withstand a crisis.
“We have a much better regulated financial system now,” CFP Stacy Francis, president, and CEO of Francis Financial, told CNBC. “The banks will be a big part of the solution to save the economy this time.”
Where these recessions were similar: the enormous debt
So, where can we say the Great Recession and the Great Pandemic have something in common? Both Presidents, Obama and Trump, were criticized for growing the national debt with increased spending.
According to the Washington Post, as the federal government tried to revive the economy after the Great Recession, Obama’s funding of the wars in Iraq and Afghanistan, plus continuing most of the Bush tax cuts, added to increased debt.
Similarly, Trump’s 2017 tax cut added about $1.5 trillion more to the debt. Then, the pandemic forced Congress to respond with more than $3 trillion in aid. The result? A national debt that is at the highest levels since World War II.
Economists say the bulge in spending after the Great Recession and Great Pandemic was necessary and unavoidable.
Let’s hope that lessons based on history and current research help policymakers focus on sensible austerity measures to avoid being in worse shape when the next big crisis arrives.