Since the novel coronavirus (COVID-19) became a global pandemic, it has had a significant impact on both the economy and financial markets. Some have likened the fallout to the Global Financial Crisis of 2008. However, there are some important differences between the two, which we'll explore in this article.
1. The 2008 Financial Crisis Caused Great Confusion
When the Global Financial Crisis took place, many people had little understanding of what was going on. David Leonhardt, a columnist for The New York Times, summed this up in a March 2008 article titled "Can't Grasp Credit Crisis? Join the Club."
Nick Bayley, who was head of regulation for the London Stock Exchange when the crisis took place, told The Financial Times that 95% of people had no idea what happened during this tumultuous period. According to Bayley, these individuals knew only that "rich bankers" were at fault, that the government had to step in and save the banks and that it left a rather expensive tax bill.
Later on, the picture became clearer as market observers started pointing to a wide range of factors as causing the financial meltdown. Even then, not everyone agreed on what variables were to blame for the financial crisis.
For example, the Financial Crisis Inquiry Commission (FCIC), which was set up to look into what developments caused this tumultuous event, wrote a majority report that pointed to a relatively short list of causal factors. They included "dramatic failures of corporate governance and risk management at many systemically important financial institutions" and "a combination of excessive borrowing, risky investments, and lack of transparency."
However, other members of the FCIC wrote two dissents, with one authored by three Republican members of the commission, asserting that myriad factors helped trigger the crisis. More specifically, the authors listed "Ten Essential Causes of the Financial and Economic Crisis," but also emphasised that due to length restrictions, they were unable to cover every variable that contributed to the event.
While the Global Financial Crisis was an intricate matter, the coronavirus may be a bit easier to understand. While we don't know everything about it, we do know the basics, for example how to avoid spreading it. Further, the U.S. Centers for Disease Control and Prevention (CDC) released basic guidelines for people to use to protect themselves, including practicing social distancing and washing hands with soap and water for at least 20 seconds.
In addition, we know the origins of the coronavirus. A case of pneumonia, whose cause was unidentified at the time, was reported in Wuhan, China on 31 December 2019. On 13 January, Thailand's Ministry of Public Health reported the first case of the virus outside of China.
2. The Coronavirus Is A Viral Pandemic
The novel coronavirus, which creates the disease COVID-19, is transmitted primarily through small, respiratory droplets expelled by people's noses and mouths. A person can obtain coronavirus by breathing in these droplets. Alternatively, people can contract coronavirus by touching surfaces that have been coughed on and then touching their eyes, nose or mouth without washing their hands first.
On 11 March 2020, the World Health Organisation (WHO) declared the coronavirus a pandemic during a COVID-19 media briefing. "Pandemic is not a word to use lightly or carelessly," said Dr. Tedros Adhanom Ghebreyesus, the director-general of WHO. "We have never before seen a pandemic sparked by a coronavirus."
To summarise, the coronavirus is a viral pandemic, while the Global Financial Crisis was not. The coronavirus pandemic has indeed had a significant impact on the economy, as companies in certain industries have been shutting their doors. It has also had a notable impact on asset prices, causing oil and stocks to suffer sharp losses. While the Global Financial Crisis also had a substantial impact on the global economy, it was clearly not viral in nature.
3. The Banks Are Not In Danger Of Failing
While many banks required bailouts during the Global Financial Crisis, the coronavirus pandemic has not put these financial institutions on the brink of failure, at least it has not at the time of this writing. Also, these organisations weren't in a good place to weather dire economic conditions during the Global Financial Crisis, but they are well-prepared now, according to the results of Federal Reserve stress tests carried out in June 2019.
When these financial institutions, which at the time held roughly 70% of all assets of banks doing business in the U.S., were tested using the conditions of a severe recession, they maintained healthy levels of capital that would allow them to remain significantly above the amounts required by existing regulations.
"The results confirm that our financial system remains resilient," said Richard Quarles, member of the Federal Reserve's Board of Governors and vice chair for supervision. "The nation's largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock."
4. Coronavirus Origins Not Blamed On Gross Negligence
The novel coronavirus that became a global pandemic in 2020 was the result of evolution, according to a paper that appeared in the journal Natural Medicine. After the outbreak turned into a pandemic, Chinese scientists analysed its genome.
"By comparing the available genome sequence data for known coronavirus strains, we can firmly determine that SARS-CoV-2 originated through natural processes," wrote Kristian Andersen, an associate professor in the Department of Integrative Structural and Computational Biology at Scripps Research. As a result, the coronavirus was not developed in a lab, according to the paper. In other words, it was not the result of anyone's nefarious actions or gross negligence.
In contrast, the authors of the FCIC pointed to human negligence as helping cause the Global Financial Crisis. "The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire," they wrote.
"The captains of finance and the public stewards of our financial system ignored warnings
and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public," the authors stated. "Theirs was a big miss, not a stumble."
5. The Global Financial Crisis Was More Complex
The variables cited for triggering the Global Financial Crisis were many and interconnected. Countless analyses were presented surrounding the causes of that event. In comparison, the coronavirus is a bit more straightforward, at least for now.
The coronavirus has caused widespread illness, with more than 1.9 million confirmed cases and over 118,000 deaths worldwide as of 13 April 2020, according to figures provided by Johns Hopkins University. As of that date, it had already impacted several industries, namely hospitality and travel.
However, industry analysts do not seem confused about which sectors, specifically, are likely to suffer the most as a result of coronavirus. "The travel, leisure & hospitality, airline, and other industries are going to experience layoffs, as well as small businesses in areas where large public gatherings have been cancelled or postponed," Thomas Simons, who works for global investment bank Jefferies as an economist, told MarketWatch.
While the coronavirus situation has generated comparisons to the Global Financial Crisis, these two matters certainly have their differences. For starters, global health officials have a good understanding of the novel virus, including how to stem its spread.
In contrast, the financial crisis was far less straightforward, as market observers pointed to multiple causes and frequently disagreed on what triggered the event. The coronavirus pandemic's economic implications seem more straightforward, as analysts know which sectors have suffered the greatest impact. This time around, major U.S. banks are well-positioned to survive harsh economic conditions, according to the latest stress tests.
Finally, while many pointed to gross negligence as a major factor behind the Global Financial Crisis, the novel coronavirus seems to be a different story, as it apparently was the result of natural evolution.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…