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Insight | How is Covid-19 Economic Fallout in U.S. Different from 2008?

April 10, 2020

The Federal Reserve announced on March 23 a string of new measures, widely known as “unlimited QE,” to tackle the economic fallout from the covid-19 pandemic. This second wave of initiatives mainly include the buying of unlimited amount of bonds as well as support for households, large and small businesses and local governments.

According to Tang Yao, professor with Peking University's Guanghua School of Management, the bond-buying part is, in essence, a repeat of QE in 2013 and 2014 in order to ensure credit flows, but the strengthened support for the private sectors is an innovative move for the Fed.

However, Tang pointed out that the ongoing outbreak-induced economic fallout is notably different from the 2008 crisis. The subprime mortgage crisis led to recession back then and the ensuing credit contraction and panic caused demand to collapse, but it didn't affect the short-term supply capability of the real economy.

“This time the real economy is severely battered by the virus as demand and supply both are plunging and the pressure on cash flow of businesses and households means a large amount of private sector debts are prone to default,” Tang said.

Also, economic problems from now and then manifest themselves in different ways, he noted. The 2008 crisis mainly saw some large financial institutions and companies suffer liquidity issues and drag down the entire economy, but the ongoing outbreak is indiscriminately,directly affecting large, medium and small businesses.

Last but not least, the financial crisis unfolded gradually between 2007 and 2009 as the Treasury Department and the Fed sought solutions, but this time the Fed intervened very early with a systematic plan, and so far no 2008-style crisis has appeared in key financial institutions.

“Stock-wise, the outbreak is breaking up cash flow, and without cash flow there is no price, so its stock market is still in a downward trend,” he said.

Tang warned that the current financial risks could still be growing and a large-scale financial crisis could not be ruled out yet as the covid-19's full-scope impact on the U.S. real economy is still uncertain.