Comparing Global Financial Meltdown of 2008 and The COVID 19 Slowdown

Running head: The COVID- Slowdown and the Global Financial Meltdown of 2008 1

The COVID-19 Slowdown and the Global Financial Meltdown of 2008 14

The COVID-19 Slowdown and the Global Financial Meltdown of 2008

Coronavirus virus, commonly known as COVID-19, has caused the world's greatest fear since the 2008 global financial crisis. With its rapid transmission rate, the World Health Organization announced that it had surpassed the epidemic situation to a pandemic. The virus symptoms include flu-like symptoms such as coughing, fever that affect the respiratory system, but they are more lethal than other respiratory diseases (Lusting &Mariscal, 2020). After COVID-19 was detected, it has been reported in all countries globally, affecting millions of people and causing hundreds of thousands of deaths in countries such as South Korea, China, India, Italy, the US, and more than 100 countries. The global nature of the measures placed to affect the productivity of the sectors and corporations in the global value-added chains and the specific businesses. Most economists wonder whether the economic fall will be as it was experienced during the great financial crisis. The unemployment rates, firms that have dissolved into bankruptcy are some of the governments' problems. Implementation of the lockdown by most countries has slowed down consumption making the financial and economic situation more unknown than the time of the global financial crisis that affected only the financial condition of the nations.

The triggers of the economic meltdown of 2008

The drop in demand in the United States at the end of 2006 and the beginning of 2007 was the primary cause of the crisis (Blanchard, 2019). The low prices first lead to substandard mortgage crises where essential mortgages were given to illiterate borrowers at an accommodating rate. Refinancing the mortgages became more challenging as the prices began to decline. Accommodating rate mortgages were reset to higher rates, creating a wave of repayment problems for most standard borrowers, followed by foreclosures (Pop, 2009). A result of this was the value of the residential properties and mortgages that were issued declined further. As time progressed, the decline of residential properties was followed by similar residential prices worldwide.

The crisis had its roots at high-level leverage for the financial institutions developed by increasing liquidity available for borrowing at a meager rate. The resources for lending were not available from banks and hedge funds which entered the market where people could borrow money at a lower price than banks. Private equity funds, pension funds, and mutual funds entered the market to bring a variety to other portfolios, increasing their demand and the insurance companies (Pop, 2009). Investment banks also joined the credit market as the SEC allowed the banks to benefit from the regulations to manage their risks voluntarily.

The financial crisis in the US

The first sign of distress was present since February 2007 when the HBSC announced that it had encountered losses connected to the US Substandard mortgage. Later within the month, Federal Home Loan Mortgage Corporation declared that it would not buy the riskiest substandard mortgages and mortgage-related securities (Pop, 2009). According to Guillen (2009), the chairman of the treasury department, Ben Bernanke, said "the growing number of mortgage defaults will not seriously harm the US economy" in May of 2017.

When several business people lost faith in the value of mortgage-backed securities and collateralized debt obligations in July 2017, the valuation of commercial banking core responsibilities by subprime mortgages plummeted. Since 2004, financial products have grown in popularity to refinancing assets and spreading risk among many investors in a crisis. (Pop, 2009). They acted like a catalyst in the financial system due to the number of web connections built among financial institutions worldwide due to globalization.

In 2008, the regulators issued warnings about the financial instruments created around lending and borrowing may cause the next financial crisis. In its September 2006 Global Financial Stability responsibility report, the International monetary fund stated that the structured credits were its main concerns if the financial market took a turn for the worst (Pop, 2009). The warnings given played a core role in knowing that the behavior of the structured edit products in the unusual conditions was limited or it was next to zero. Because the products got developed a decade ago when the interest rates were low, the risk appetite was high.

The financial crisis in the United Kingdom

The United Kingdom, like many other European states, is experiencing a significant downturn as a result of the global economic slowdown. The recession's fear extended to several other nations, resulting in a deep and long-lasting deflation. The destruction of Northern Rock in 2007 marked the beginning of this situation. In over a decade, consumers swarmed to Northern Rock, the first British financial institution in September to withdraw their funds. Throughout this era, the institution faced liquidity issues due to the global recession, which prevented it from obtaining the short-term resources required ("UK economy: The story of the downturn," 2013). Mainly with the fall of the Leman Brothers, the United States' biggest investment group, in 2008, the global stock markets experienced an unprecedented recession, with stock exchanges around the globe crashing as the severity of the lenders' issues became apparent.

In the United Kingdom, citizens would have to bail out RBS, Lloyds, and HBOS. The majority of all these institutions had made significant investments in bonds connected to the US property market (li et al., 2012). The United Kingdom was expected to have an enormous debt on record, mainly during April 2009. The discrepancy between both the government's total revenues and expenses was £175 billion. The IFS of both legislative bodies issued a warning as the economic harm affected by the financial downturn reached its peak. Numerous companies were closed throughout this phase, and over a million people lost their jobs. The emergence of a downturn in the Eurozone, which is the UK's biggest trade partner, was determined by the timing of austerity measures for Greece and Ireland. After some growth in the Country, GDP fell in the final quarter of the year ("UK economy: The story of the downturn," 2013). The unemployment rate had dropped further than predicted, causing a drop in GDP, which had recovered to a greater degree.

The economic meltdown in China

The Chinese economy relied on foreign exchange and expenditure just after European Union in 2007; China surpassed the United States to be the most significant global product supplier. In 2007, export growth accounted for almost a third of the country's GDP growth (Morrison, 2009). China restricts investment inflows and expenditures in several ways. Such constraints appear to restrict civilians' and businesses' freedom to spend their assets abroad, forcing them to finance themselves locally. Since the disclosure was minimal at best, China was capable of sustaining its rapid economic growth.

The problematic US mortgage-backed securities also were revealed to Chinese government departments. The constitutional financial outflows from China's foreign exchange reserves are accounted for by federal agencies. China's assets are thought to have been deeply involved in US bonds. The global financial crisis influenced economic outlooks and perceived risks worldwide, and China was no exception. Many economies throughout the world were buoyant, and China's stock market seemed no different. Between 2005 and 2007, China's capital sector grew at an exponential rate. Most economies are prone to suffer through signs of stress due to their exponential rise (Li et al., 2012). The property market in many Metropolitan areas has shown signs of slowing down development, with development slowing, values dropping, and an increasing number of uninhabited properties. It puts more strain on financial institutions to reduce interest rates in order even further to balance the economy (Morrison, 2009). More than 20 million immigrants lose their work as a result of it. "China's exporting production levels declined dramatically in November 2008, from 20% in October to -2.2 percent. China's output fell by around 17% in 2009, eventually rebounding to solid growth in 2010, as many developed countries started to expand again" (Li et al., 2012). The global forecasting estimated China has a GDP growth which was to slow down to 6.6% in the year 2009 contrasted to the other years which was 13% in 2007 and 9% in 2008, leading to social unrest(Morrison,2009).

Rescue efforts in the US

To get out of the Great Recession, the legislature passed several changes. Addressing the fraud that so many investment banks engaged in, the Dodd-Frank Wall Street Reform and Consumer Protection Act was created and passed into law. The legislation stipulated that government funds will never help out financial companies and that the Federal Reserve's emergency powers to save and reanimate investment banks would be restricted. The Financial Stability Oversight Council had been founded by the legislation to gather and process information and identify and keep up with the latest risks across the banking markets. The law made it illegal to use government funds for stimulus packages and insolvencies. It imposes the Volker rule, which allows most policymakers to ban mutual fund and financial services company proprietary trading, acquisition, and endorsement, as well as limiting partnerships with institutional investors (Schoeon, 2017). The Act made derivatives more transparent and accountable. The Dodd-Frank Act establishes an interest rates department within the Securities and Exchange Commission. It mandates that the SEC review and document the Nationally Recognized Statistical Rating Organization at a minimum once every year. The legislation states financial organizations guarantee that lenders can pay back the loans, which bans monetary incentives and rewards for pushing lenders towards more expensive mortgage lending. It can be done by preconditioning borrowers and insurance brokers that neglect to agree to the new mortgage requirements, including up to three years of lending rates, responsibility for losses, and legal expenses.

Businesses that offer loan-backed bonds must reveal additional detail about financial instruments, check the effectiveness of the investments, and maintain at most 5% of the market risk only. If the collateral debts meet risk-reduction requirements, in which case they must bear losses in addition to the protection transactions (Schoeon, 2017). It ensured there was transparency in the banking system.

Rescue efforts in China

In response to the global financial crisis, China has taken several measures. The state lowered interest rates while increasing government borrowing. China adopted policies to boost and readjust the nation, improve domestic consumption, redefine and promote unique sectors, and raise rural poor people's income. The administration proposed a two-year $586 billion stimulus program aimed at infrastructure investments such as regional transportation infrastructure, including highways, affordable homes, infrastructure development, technical advancement, education and health, and restoring disaster-stricken areas (Morrison,2009). The economic stimulus outlines measure the administration intends to bring to support sectors critical to China's economic development.

Rescue efforts in the United Kingdom

During the 2008-2009 financial crisis, the government has offered quantitative easing by lowering VAT and increasing taxes. Officials aimed to deal with the rising public debt by cutting government spending and raising taxes. In cooperation with the department and its European allies, Regulatory authorities ensured that financial firms minimized the number of risks they took. They are better protected from potential crises because they have higher cash balances and more liquid assets to cover unexpected financing gaps. According to other rescue operations, the UK already had plans to "ring-fence high street banks from their higher-risk investment banking arms" (Bunge,2017). The guidelines were put in place to prevent banking institutions from circumventing the laws.

The role of multilateral Bretton Wood's institutions in the economic rescue efforts

The global financial crisis is the testing point for the ability of the International Monetary Fund in its function as the central institution that supervises the global monetary system. The World Bank increased its lending's available to the crisis. The bank's response was more significant than other Bretton Multilateral Woods Institutions as it expanded the availability of fast disbursing funds (IEG (Independent Evaluation Group). 2012). The banks increased lending to middle-income countries also corresponded with other MDBs like IMF, which focused selectively on a limited number of crisis-affected countries. The more affected countries were those that were dependent on the United States. Most countries such as Ukraine, Belarus were to benefit from the crisis loans. The IMF had triggered its Emergency Financing Mechanism to speed the standard loan process to aid the countries affected. The IMF used the Exogenous Shock Facility to provide policy support and financial assistance to low-income countries facing a crisis that the government could not deal with. The Inter-American Development bank also did the financial aid, the Andean Development Corporation, the Latin American Fund for Reserves to assist the smaller countries dependent on tourism and investment.

Reforming the global macroeconomic surveillance allows states to have capabilities of internal settlement and different opinions. The IMF conducts effective multilateral management of the international economy. Efforts to increase cooperation with the global fiscal standard setters and other economic international working groups to help in the reforms. The rescue efforts needed the IMF to oversee the rules placed over the banks to ensure that each member country complied with the laws (Weiss, 2008). The members of those countries were supposed to provide IMF with information and confirm with IMF upon request of using the fund.

The Similarities between the global financial crisis and the COVID-19 downturn

With the planet is facing its most serious threat after the global financial crisis, many economists have to draw lessons from experience. There are differences and similarities amid the two primary situations. Both the COVID-19 and the Global financial crisis share the uncertainty as the risk cannot be traced, so the probability of its occurrence and impact cannot be delineated (Strauss-Kahn, 2020). The loans are offered to American citizens with no personal earnings or employment, and they were distributed via sound mortgage-backed securities assets and long-term instruments. Hence, no one knew where even the risk was or how important it was. As just a consequence, foreign partnerships have frozen, and instability has increased. COVID-19 crisis solidifies an enormous amount of retailer operations. There has been a critical drop in the stock exchanges of major countries between both emergencies. The stock exchanges in early 2009 tended to drop then go at a slow pace to adjust. With COVID-19, the impact on the GDP depends on how long and rules placed by countries as they implement lockdown.

Lawmakers in both emergencies initially overlooked the essence of the issue. In 2007, several financial institutions proceeded to rate collateralized debt obligations as a reduced probability. There was a decline because many policymakers depended on conventional models of commercial property activity. The Trump government's ambitious attempts to lessen the complexity of the health crisis and much-delayed monitoring and prevention efforts have resulted in COVID-19. When the danger is not correctly measured, and that one of the leading sources of financial repercussions is the failure to detect positive cases early (lusting &Mariscal, 2020). The global financial crisis began as an issue in the subprime mortgage market in the United States, but it quickly spread to the global financial services sector. COVID-19 was previously assumed to be a Chinese issue. Several people believed it could even be contained; nevertheless, the disturbances it generated were visible well before the infection spread to every region.

The differences between the COVID-19 downturn and the global financial crisis

The 2008 financial crisis and the COVID-19 downturn have some variations, with the 2008 global financial crisis impacting the actual market, commodity production, and consumption first (Strauss-kahn, 2020). The virus's widespread contagion and highly interconnected distribution networks have made COVID-19 a global pandemic after a short time since the first cases reported in China.

Due to budgetary strategies and substantial government debt levels in so many underdeveloped nations, government agencies appeared to have a smaller response capacity in 2020. There were fears earlier when financial institutions ran out of resources due to low long-term and short-term lending rates. The institutions had many assets that they were stockpiling rather than just directing nonfinancial operators (Strauss-kahn, 2020). Many financial institutions responded quickly and devised ways to summarize their behavior based on the lessons learned from the Great Recession. Synchronized responses from large nations lose sight of true intergovernmental collaboration, particularly among states. The sense of world leadership, as well as the impetus, appears to have waned. The majority of the countries are all in the same situation as they were in 2009 when the Community of 20 assumed leadership. Regrettably, assaults on global cooperation have had negative consequences ever since.

Lessons from the Great recession applied to the COVID-19 economic crisis

Many governments are determined to avoid mistakes that the policymakers made during the great recession. Many administrations responded to the Great Recession by flooding the banking sector with credit, deregulating banks, lowering interest rates, and rising government expenditure by economic austerity. However, most of these interventions of the global crisis lead to an international job crisis as the credit crunch suffocated the economy, and the trade flows fell. Some lessons learned include the response by the government and the banks by channeling it, nonfinancial agents. The governments of China, US spent a lot on the stimulus after the great recession but have paid far less on the response to the coronavirus disease (Jaeger, 2020) because the recovery packages are larger. A small proportion gets directed to critical rescue operations such as hospitals and unemployment.

Economic recovery plan for post-COVID 19 government stabilization

COVID-19 has led to a recession where aggregate demand falls, resulting in a lower growth wage growth rate, decreased employment, low business revenue, and lower business investment. Government can replace the most aggregate demand by using the fiscal stimulus and creating a financial rescue package to decrease tax revenue. The key goal of the plan is to restart the economic growth in the country. Fiscal stimulus targeted where the policies effectively contribute to inclusive economic recovery lessens the adverse effects of the recession and fastens the recovery. To restart the economy, most governments have pumped money into small businesses to continue the economy and healthcare. Many countries have focused mainly on the emergency responses to the crisis as the measures introduced by governments are for cushioning the impact of the situation.

Governments have cut the rate at which the banks can borrow from each other for short-term and long-term rates to lower borrowing costs on mortgages (Cheng et al., 2021). To cover these costs, the government has to borrow or use money from its federal reserves. Fiscal stimulus leads to an increase in the interest rates and reforms on the tax landscape by supporting solid growth. It can occur with other policies over time, such as the central bank keeping government bonds on their balance sheets indefinitely ("Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience," 2020). The government should consider broadening the measures and addressing inefficient tax expenditures efficiently when the tax system is being reconsidered.

The government can expand tax bases from tax bases that are not detrimental to growth ("Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience," 2020). Bond yields could rise as a result of the economic austerity. Household rates have increased compared to international levels because several investors scope out the US for ventures because they earn a considerable inflation rate, implying better financial results. Due to the increased requirement for US funding, the currency is in fierce competition because several buyers must exchange their money for dollars to acquire. When there are so many services and products that the market cannot provide, demand rates rise. The efficacy of economic austerity will be hampered if inflation increases.