🌎 2008 differences
Axios Macro ... by Neil Irwin and Courtenay Brown ·
Today's newsletter, edited by Javier E. David, is 743 words, a 3-minute read.
March 20th 2023 12:06 PM
Find someone who loves you as much as the world's leading central banks love joint announcements of dollar swap lines.
That's what the Federal Reserve and its counterparts overseas did yesterday afternoon, returning to a playbook used to soothe financial jitters in the 2008 financial crisis, the 2011 eurozone crisis and the 2020 pandemic.
Speaking of 2008, that is our focus in today's Macro — how this episode looks different from that crisis, in ways that bode well and less so.
1 big thing: How this crisis is different from 2008
Illustration of a crumpled up dollar bill as a globe.
Illustration: Aïda Amer/Axios
Sunday night bank bailouts on both sides of the Atlantic. Joint announcements by global central banks. Fear and uncertainty sweeping markets.
Much about the last 10 days has felt like the 2008 global financial crisis. But there are crucial differences that lower the risk this episode will have the same seismic impact on the world economy as 15 years ago.
Why it matters: There's no doubt that the still-unfolding banking panic has raised the odds of a recession. But when you scrutinize the details of what is happening, there is less reason to think this will become a sprawling mega-crisis.
The big picture: It helps to start with an explanation of the root cause of the two crises. Back in 2008, all kinds of highly levered institutions owned complex securities, particularly backed by home mortgages, that turned out to be far less valuable than advertised.
The 2008 crisis was, in effect, a series of institutions either failing or being bailed out as those losses became apparent.
This time around, the root problem isn't bad loans. Rather, the Fed's rapid tightening has created paper losses for banks that made loans or bought long-term bonds when rates were much lower.
That's prompted depositors to pull money out, causing forced selling that turns paper losses into real ones.
Between the lines: Three big differences stand out.
(1) First, part of what made the 2008 crisis so tough was many losses took place in lightly regulated or unregulated corners of the financial system.
Lehman Brothers and Bear Stearns fit those molds. AIG was an insurance company. Regulators had limited visibility into the massive market for asset-backed securities.
By contrast, the problems this time around have taken place in traditional banks: They have an entire infrastructure of deposit insurance, access to emergency Fed lending, and oversight to reassure the public about their solvency.
(2) Second, the post-crisis reforms contained in the D0dd-Frank Act really did change some things. Most importantly: Capital ratios are higher than they were in 2008, dramatically so at the largest banks, giving them a greater financial cushion.
And regulators have more authority to resolve even a large failed bank, which should prevent a chaotic situation like what followed the Lehman Brothers bankruptcy.
(3) Third, and perhaps most importantly, the problems now should have less risk of feeding on themselves in the kind of vicious cycle that makes financial crises so damaging.
If the economy starts to falter because of a credit crunch, the Fed will likely relent and consider cutting rates. That, in turn, would ease the very pressure on bank balance sheets that created the squeeze in the first place.
By contrast, in 2008, bad mortgages soured credit markets and slowed the economy. Then, weakening growth caused more mortgage defaults. It was a self-accelerating cycle, not a self-correcting one.
2. Yes, but …
Officials including Fed chair Ben Bernanke, Treasury Secretary Hank Paulson and House Speaker Nancy Pelosi in 2008. Photo: Scott J. Ferrell/Congressional Quarterly/Getty Images
Those factors all point toward this causing less economic damage than the 2008 crisis. But there are some other differences between then and now that could cut the other way.
State of play: The U.S. political environment now is rather different than in 2008. Should Congressional action be needed to rescue the financial system, it would likely be hard (read: impossible) for the Biden administration to get the votes.
Flashback: When things got really getting out of control in the fall of 2008, the Bush administration proposed the $800 billion Troubled Asset Relief Program (TARP). The Democratic House leadership was on board, though the program was deeply unpopular.
Even with Nancy Pelosi — a famously effective vote-counter and House speaker with a 38-seat majority — there were enough 'no' votes that TARP failed on its first vote, sending markets into a tailspin.
It's hard to imagine a Republican speaker striking a deal with Biden for any rescue plan today, and if he did, it would be even less clear where the votes would come from.
Moreover, the debt ceiling standoff that looks likely to play out this summer would add to complexity and risk in an already-turbulent financial backdrop in unexpected ways.
And while Dodd-Frank strengthened regulation, it also restricted the Fed's ability to use its emergency lending authority for bailouts, in an effort to prevent anything like the AIG bailout from happening again.
The bottom line: There are important reasons to think that recent banking troubles should be more manageable and less disastrous than the crisis 15 years ago. But the nature of a financial crisis is that events move fast and in non-linear, unpredictable ways
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