By Numair Haq, Jordan Kostecki, and Omar Syed
In the midst of our current economic troubles, it's hard not to draw comparisons to the 2008 financial crisis. Both events have left a mark on global markets, industries, and people in various ways. This article analyzes similarities and differences between these two crises in the affected industries – from what triggered them to how governments and economies responded. By exploring these connections, we aim to understand how we can learn from the past to steer ourselves toward recovery in the present situation.
Housing Market
The trajectory of annual rates for single-family home sales over the years reflects the influence of various economic and external factors . Before the 2008 financial crisis, home sales experienced consistent growth due to factors like easy credit access and a booming housing market. The sharp decline in sales from 1.4 million to 400 thousand can be related to the bursting of the housing bubble and the broader financial crisis. Following 2008, there were significant fluctuations until 2011, when the market gradually stabilized and began to recover. Economic stimulus measures and financial system stabilization efforts likely fueled this recovery, although it was relatively prolonged, a common characteristic of major financial crises.
The Covid-19 pandemic in 2020 led to unique circumstances. The sudden surge in home sales from 500 thousand to 1 million in April 2020 resulted from pandemic-related restrictions and increased demand for remote work capabilities. A shift in lifestyle preferences, with more people seeking larger homes and suburban living, contributed to this rise. Home sales gradually returned to normal levels, indicating a correction from the initial surge. However, in 2021, the market experienced another upswing after the easing of pandemic restrictions and the distribution of stimulus funds. Pent-up demand and ongoing interest in housing likely drove the rebound, influenced by evolving work-from-home trends.
The challenges faced by the housing market in 2022, including higher interest rates and elevated housing prices, contributed to a notable downturn in sales. These factors made homeownership less affordable for some prospective buyers, leading to a slowdown in the market. The current signs of stabilization in 2023 suggest that the housing market is adapting to the changing economic landscape. The economy's stabilization may be fueling renewed interest in home purchases. However, it's important to note that the current economic downturn is recovering more slowly than the relatively swift recovery observed after the 2008 financial crisis.
Data: Census Bureau
The 2008 crisis experienced a relatively steady decline in sales, followed by a gradual recovery. In contrast, the current crisis saw a sudden surge in 2020, followed by significant fluctuations for two years post-Covid, showing signs of stabilization emerging in 2023.This difference in the pattern of fluctuations suggests that the recovery time for the housing market in the current scenario is likely to be more prolonged compared to the relatively quicker recovery observed in 2008. The unique circumstances surrounding the Covid-19 pandemic and the subsequent economic challenges have contributed to this distinctive trajectory in the housing market.
Inflation
The abrupt and significant plummet in personal consumption expenditure rates from 4.13 to -1.1 percent change during the middle of 2008 could be result of the global financial crisis that unfolded during that period. The crisis, triggered by the collapse of major financial institutions and characterized by a severe credit crunch, led to a sharp contraction in economic activity. As businesses struggled and unemployment rose, the sudden spike in inflation stems from rapidly increasing commodity prices, particularly oil. The subsequent swift stabilization in 2009 can be explained by the aggressive monetary and fiscal policy measures implemented by governments and central banks worldwide to counteract the crisis, restoring confidence and normalizing economic conditions.
In contrast, the current economic crisis initiated by the Covid-19 pandemic in 2020 unfolded in a different manner. The gradual increase in personal consumption expenditure rates, peaking in 2022 at 7.11 percent change, reflects the unique challenges posed by the pandemic. The pandemic disrupted global supply chains, leading to shortages in certain goods and services, which, in turn, exerted upward pressure on prices.
Additionally, widespread lockdowns and restrictions affected consumer behavior, contributing to shifts in demand patterns. The gradual nature of inflation increase suggests a more prolonged impact on the economy compared to the sudden shock of the 2008 financial crisis.
The persistent elevation of inflation rates above the usual threshold of –0.5 to 0.5 points post-peak in 2022 indicates that the economic recovery from the Covid-19 crisis is taking longer than expected. Several factors contribute to this prolonged period of elevated inflation. Supply chain disruptions persist, and the adaptation of businesses to new operating conditions, such as increased reliance on remote work and changes in consumer preferences, introduces additional uncertainties. The complex interplay of these factors has made it challenging for the economy to revert quickly to pre-pandemic levels.
Furthermore, the peak in 2022 compared to 2008 (nearly 3 percent higher) suggests that the current crisis may have more persistent economic consequences. Due to the unprecedented nature of the Covid-19 pandemic and the challenges associated with managing a global health crisis on such a scale. The need for ongoing public health measures, potential shifts in global economic dynamics, and the lingering effects on consumer and investor confidence all contribute to the prolonged period of elevated inflation rates, indicating a potentially more protracted recovery compared to the aftermath of the 2008 financial crisis. However, this is still debated among economists today.
Data: FRED
Unemployment
The unique nature of the 2008 financial crisis profoundly influenced the trajectory of unemployment rates. Fundamentally, the 2008 crisis was characterized by the collapse of major financial institutions and the bursting of the housing market bubble. This dual shock created a ripple effect throughout the economy, leading to a prolonged and deep recession. The intricacies of financial system restructuring and the need to address underlying economic issues posed significant challenges for governments and financial institutions. As a result, the recovery process was protracted, spanning over a decade. Comprehensive measures were implemented to stabilize the economy and restore confidence in the markets, but the normalization of unemployment rates was a slow and gradual process. Over the course of ten years, unemployment rates decreased from the peak of 17.6% to 7.4%, reflecting the complexities and challenges inherent in navigating the aftermath of the 2008 financial crisis.
In contrast, the response to the 2020 pandemic was characterized by swift and massive fiscal stimulus packages, monetary policy interventions, and public health measures. Governments worldwide implemented unprecedented measures to curb the immediate economic fallout, providing financial support to individuals and businesses. This rapid and extensive intervention helped cushion the impact of the crisis, contributing to a quicker economic rebound as unemployment rates shot down from 22.5% to 12.5% in 1 year. Furthermore, the resilience of certain sectors during the pandemic played a crucial role. Unlike the 2008 crisis, where multiple industries were severely affected, the pandemic disproportionately impacted specific sectors, such as travel, hospitality, and entertainment. As vaccination efforts progressed and restrictions eased, these sectors rebounded, contributing to the overall recovery in employment.
The comparison of the two crises underscores the importance of understanding the unique characteristics and triggers of each economic downturn. While the 2008 financial crisis necessitated structural reforms and extensive recovery measures, the 2020 pandemic prompted immediate and unprecedented interventions that facilitated a more rapid return to pre-crisis unemployment levels.
Data: FRED
Financial Market Impact
Leading up to The Great Recession, financial markets experienced relentless growth and low-interest rates. Interconnected supply chains and international trade linked individual decisions to rising global debt, with the housing market acting as a prominent catalyst.
Prior to the Great Recession, the housing market boomed with soaring home prices and demand for mortgages. Irresponsible subprime lending, power imbalances between big banks, rating agencies, and CDO managers allowed individuals with unstable credit histories to access home loans. Entities that should have been accountable for managing the risks of the mortgage bonds and the CDOs faced integrity-challenging levels of competition, saw unethical benefits from their bank counterparts, and ultimately failed to represent the best interests of their shareholders. Therefore, the process of securitization was compromised through opaque risk levels, complex package offerings, and misaligned intentions (McKay, Adam. The Big Short. Paramount Pictures, 2015.). As seen below, it was not until the Recession that the rate of loan issuance decreased.
Data: FRED
Due to prolonged periods of low-interest rates and sustained double-digit growth in U.S. home prices, investors began seeking short-term gains by buying and selling homes, transferring the risk to the next investor. This model worked only as long as housing prices continued to steadily appreciate. A change in this trend would eventually trigger the recession (McKay, Adam. The Big Short. Paramount Pictures, 2015.).
Data: FRED
As seen above, unavoidably, when home prices reached a peak in the second quarter of 2007, the housing investment model crumbled as individuals with unfit credit scores now had to pay steep and unexpected interest. Consequently, loan delinquencies skyrocketed, and the clotted flow of cash put several invulnerable financial institutions in great debt as they too would not be able to pass up the cash (McKay, Adam. The Big Short. Paramount Pictures, 2015.).
Data: FRED
Due to interlinked international trade, this default spilled beyond U.S. borders as the global economy would contract this recession. Massive layoffs drove up unemployment rates, reduced consumer spending, and resulted in the largest stock market crash since the dot-com bubble burst.
At this point, governments had to intervene with bailouts to prevent a systemic collapse of the financial system. Some would argue that this expected safety net enabled the largest, untouchable financial institutions to feel “too big to fail” during their periods of reckless lending. Nonetheless, the long-term effects of this recession were felt as individuals and financial institutions became more risk-averse, moderating their exposure through leverage ratios, and facing increased regulatory scrutiny.
Regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, emphasized financial stability through a range of measures to increase the previously absent transparency and risk management practices. Some of the most prominent reforms from this act include the Financial Stability Oversight Council (FSOC), the Consumer Financial Protection Bureau (CFPB), and the Volcker Rule, which scrutinized and broke apart large and risky financial institutions, provided improved consumer transparency, and monitored institutional speculation, respectively. Additionally, to further build resilience, an increase in cybersecurity technologies would become expected of banks to protect customer data, financial documents, and establish chains of accountability. Lastly, to regain balance by stimulating spending and economic activity, the U.S. Federal Reserve and European Central Bank would look to maintain low-interest rates.
Data: IMD
Global economic power balances in the international trade structure were better attained with the rise of emerging markets in Asia and Europe in the absence of traditional financial centers. Furthermore, consumers resented the “too big to fail” mentality which gave rise to FinTech startups, unencumbered by legacy systems and regulatory burdens.
Data: FRED
Before the Covid-19 pandemic, the global economy experienced moderate growth generally stemming from the emerging markets that had gained power following the Global Financial Crisis. The global economy showed signs of growth, albeit varying across regions. While interest rates steadily increased, they never approached levels seen prior to the Great Financial Crisis or the 2001 Recession. In 2019, having undershot their target inflation and noting signs of slowed economic activity, the Federal Open Market Committee began lowering these rates.
Following globalization, several companies invested in building cost-effective, just-in-time, and international supply chains. It was during the Trade War that they began to evaluate nearshoring options. Tariffs and disputes began to impact global supply chains and cause uncertainty in markets. As a result, many businesses looked to move out of China and into neighboring countries to capture similar rates with reduced risk of uncertainty.
Data: Harvard Business School
As the coronavirus spilled out of China and into the world, global supply chains became compromised with dysfunctional critical steps and government-mandated economic shutdowns. In reference to the same graph above, following the onslaught of the pandemic and disruptions across industries resulting in mass layoffs, the Central Banks needed to restimulate economic activity and dropped interest rates to historical lows. They looked to stabilize financial markets by injecting liquidity and purchasing assets to counter the economic impact of the pandemic.
Debt levels significantly increased across households and affected corporate sectors. Many companies, particularly those severely affected by the pandemic like travel, hospitality, and small businesses, also resorted to borrowing to weather the economic downturn. Additionally, job losses and reduced incomes first increased individuals’ reliance on borrowing, credit cards, and loans. At this point, the U.S. government had to incur considerable debt levels through extensive borrowing to pump out fiscal stimuli to support all workers, businesses, and healthcare systems.
Data: FRED
The government’s stimuli raised confidence levels such that consumers would look to spend more disposable income than they otherwise would have. This increase in spending would set the stage for greater market volatility as several large companies incorrectly over forecasted future demand. Overall, financial markets experienced heightened volatility due to uncertainty surrounding the long-term economic outlook, vaccine development, and the effectiveness of public policy.
Data: FRED
Post-pandemic and amidst years of uncertainty and job insecurity, the global economic recovery has exhibited disparities across different regions.The economies that experienced faster rebounds can attribute their success to internal and external factors such as vaccination rates, diversification of sectors and resilient industries, effective governmental interventions, and adaptability through digital transitions.
Digital services have seen a rise in popularity, adapting to shifting customer preferences. This includes emerging technologies like cryptocurrency and blockchain, alongside established services such as online banking, cybersecurity, artificial intelligence, and data analytics.
Since the pandemic, governments have struggled with higher debt levels as they balance needed fiscal support with debt sustainability to avoid hampering any economic recovery. While maintaining investor confidence is paramount and interest rates remain low, a potential increase remains a concern for heavily indebted entities, including governments and corporations. Corporations, particularly the aforementioned affected industries, are seeing their accumulated debt continue to restrict their prospects of growth and recovery. While some households managed to stabilize their finances, others continue to face debt pressure due to job losses, reduced incomes, and ongoing economic uncertainties. Several companies that drastically over-forecasted demand, following the government’s stimulus support, are now trapped with over indexed inventory levels and discounted prices. Consequently, their employee households are seeing rising levels of debt. Governments are looking to provide some financial breathing space by restructuring debt and offering relief programs to severely affected countries and business sectors.
As the world looks to reassess supply chains, a key area of focus includes limiting reliance on global supply chains and upscaling technological innovations to enhance business resilience. Incidentally, those industries that concentrated on reassessing their resilience measures through technology, healthcare, and logistics saw faster recovery and stronger market performances. Perhaps driven by investors perceiving more adaptable and resilient supply chains as a sign of long-term sustainability.
Following the nation's rising interest in sustainable and socially responsible business, investors have seen to prioritize businesses that build their environmental, social, and governance (ESG) presence.
Lastly, geopolitical dynamics preceding the pandemic, such as changes in policy, tariffs, and international trade restrictions, continue to influence a volatile financial market.
Pandemic Factors
Variability in international COVID-19 incidence rates is evident across diverse nations. The United Kingdom stands out as the foremost among these, having the highest overall case count. Noteworthy surges occurred in January 2021 and October 2021, during which cases surpassed 500 million in each instance. These spikes can be attributed to the premature lifting of pandemic-related restrictions, with the emergence of new variants in the United Kingdom. The United States and the Euro Area also emerged prominently, demonstrating elevated rates of COVID-19 cases. In the United States, the highest case rate transpired in January 2021, while the Euro Area experienced its top rate in November 2020. This study illustrates the dynamic nature of COVID-19 metrics, indicating temporal fluctuations and geographical disparities across diverse global locales.
Examination of the Gross Domestic Product (GDP) trajectories across nations during the pandemic years reveals a universal trend of initial contraction followed by subsequent recovery, ultimately converging to approximate pre-pandemic levels. The post-pandemic increase in GDP can attribute to the enactment of relief and recovery legislation. Notably, the United Kingdom stands out with the most pronounced overall decline in GDP. Reasons for this can be due to how the United Kingdom measures public service output, along with consumer spending making up a significant proportion of the UK’s GDP. The floor for nearly all countries occurred in April 2020, although China uniquely experienced its lowest point in January 2020. This thorough examination highlights the subtle changes over time and differences between countries in how their economies bounced back from the challenges brought on by the global pandemic.
Data: FRED
An examination of personal current transfer receipts in the United States reveals a consistent upward trajectory since the onset of the millennium. In the year 2000, personal current transfer receipts amounted to approximately 1 trillion dollars, while the figure has surged to approximately 4 trillion in 2023. Significantly, three discernible spikes in personal current transfer receipts occurred in the years.
2008, 2020, and 2021. As personal current transfer receipts include government social benefits, these spikes can be blamed on the recession of 2008 and the covid-19 pandemic. This empirical assessment underscores the evolving patterns and notable fluctuations in the realm of personal financial transfers within the United States.
Preceding the global pandemic, most nations exhibited a baseline real GDP hovering around 100 on the index. Post-pandemic, there was a widespread return of GDP to pre-pandemic levels. However, noteworthy deviations are observed in the cases of the United States and China, where their GDP surpassed pre-pandemic benchmarks. The United States' GDP has now surpassed the 100-index mark, while China's GDP escalated to over 110 on the index. The high GDP levels can be attributed to growth in technology hardware and increased consumer spending. Notably, disparities in personal transfer receipts reveals a pre-pandemic valuation of approximately $3 trillion, experiencing a pronounced spike in 2020, followed by a post-pandemic stabilization at $4 trillion. This thorough analysis accentuates the unique trajectories and post-pandemic resilience observed in both national economic indices and personal transfer receipt dynamics.
Technological Advances
The historical trajectory of computer memory and storage costs has witnessed a remarkable and consistent decline across all components since 1992. Over the past three decades, memory and disks have exhibited a reduction in cost per terabyte. This can be due to the need for technological advancements. Notably, the advent of flash memory in 2003 marked an initial cost exceeding $100,000 per terabyte. By 2015, however, flash memory had undergone a considerable reduction, reaching slightly above $100 per terabyte.
The data on flash memory concludes in 2015, coinciding with the introduction of solid-state memory in 2014. The latter, commencing at just under $1000 per terabyte, has experienced a notable cost decrease, now attaining a value of less than $100 per terabyte. An increase in demand for computer memory and storage resulted in a decrease in price due to an evolution of data storage technologies. This detailed investigation underscores the sustained trend of cost reduction in computer memory and storage technologies over the past three decades, illuminating the transformative dynamics within the field.
Global internet penetration rates reveals a pervasive and substantial increase in usage across all countries. In the year 2000, every region reported less than 50% of its population utilizing the internet, and global adoption stood at approximately 10%. Presently, global internet usage has surged to 60%, with no region recording less than 30% of its population engaged online. Increases in internet usage can be seen because of human wants and needs. For example, humans want to connect with one another, they may need to gather information, or just for entertainment. Noteworthy exceptions are South Asia and Sub-Saharan Africa, where internet usage remains below 50%. These low rates can be blamed on the unaffordability of internet access for those in developing nations. Encouragingly, both regions exhibit an upward trajectory in internet adoption, underscoring the ongoing expansion of digital connectivity in these areas. This in-depth study enlightens the transformative and inclusive nature of the evolving global digital landscape.
In the technological landscape of 2008, three predominant storage and memory technologies—disks, memory, and flash memory—were commercially available. Memory was priced at approximately $50,000 per terabyte, flash memory at $10,000 per terabyte, and disks at roughly $100 per terabyte. Fast-forwarding to 2023, significant transformations have occurred, with memory now costing approximately $3,000 per terabyte, flash memory being supplanted by solid-state memory priced at around $75 per terabyte, and disks now available at approximately $10 per terabyte. This substantial reduction in prices underscores the dynamic evolution within the field.
Conclusion & Future Outlook
In comparing the 2008 financial crisis to the current economic challenges, it's evident that both have left lasting impacts on global markets and industries. This analysis delves into the housing market, revealing differing trajectories marked by a gradual decline and recovery in 2008, contrasted with a sudden surge and fluctuations in the current crisis. Inflation patterns show swift spikes in 2008, stabilized by aggressive policies, while the current crisis exhibits an increase, indicating potential prolonged impact. Unemployment paths diverge as well, with the 2008 crisis leading to a decade-long recession and the 2020 pandemic prompting swift government interventions and a quicker rebound.
The financial market impact underscores the need for adaptable strategies, supply chains' pivotal role is evident, and technological advances highlight transformative dynamics. Looking ahead, leveraging these lessons is crucial for fortifying financial systems, socio-economic safety nets, and fostering innovation to navigate the post-crisis era and build a more resilient global economy.
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