Two crises, two lessons

Context – There is a need to recognise the critical differences between global financial crisis (GFC) corona financial crisis (CFC), as they have implications for the nature and effectiveness of the solutions

Difference between Global Financial Crisis (GFC) and Corona Financial Crisis (CFC)

• Origin – 

• GFC originated in the financial sector as banks and financial intermediaries by irrational exuberance and recklessly piled on risk. 
• CFC came from outside the economic system, with supply shock from china and demand slump due to global lockdown.

• Challenge in resolution – 

• GFC, it was to restore faith in financial system
• CFC, it is to beat the pandemic (by a vaccine) and restore the public confidence.

• Asymmetry of solution – 

• GFC originated in the subprime mortgage sector of the US and then, rapidly engulfed the world. The CFC originated in the Hubei province of China and rapidly engulfed the world.
• In GFC, restoration of financial stability in USA was the most important thing .In the CFC, no country is safe until every country is safe.

• Policy intervention – 

• In GFC, Financial Sector and Real Economy reinforced each other. 
• In CFC, effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector.

• Impact:

• GFC did not affect all countries equally. China was less affected and even stimulus provided by China has kept the global economy afloat
• In CFC, no single economy is able to keep the rest of the world afloat.

Lessons from the crisis

• GFC reminded us that greed and avarice will only bring tears in the end.
• CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.