It’s different this time

By David Koch, CFP®, AIF®, CFA, Senior Wealth Advisor

It’s different this time: The current economic crisis is not a rerun of the Great Financial Crisis (GFC) – which gives us fuel for optimism

Every economic crisis is different. In fact, every crisis – from tornados to pandemics to recessions – has different attributes and impacts. But that doesn’t mean that we can’t learn from them.

We think it’s useful to consider how the current economic downturn differs significantly from what happened in 2008. Not only are the causes vastly dissimilar, we now have a stronger sense of what works in terms of remedies. In many cases, we also have more economic tools at our disposal to provide relief and get the economy moving again.

  • The GFC was a financial crisis that became a social crisis; the main financial players were either insolvent or illiquid. This locked up the entire U.S. economy. Obviously, little can get done when financial entities are unable to extend credit and process transactions. Complex financial instruments that went sour resulted in people losing their jobs and their homes.
  • The COVID-19 crisis is a social crisis that became a financial crisis; businesses, including thriving and fiscally healthy ones, have been forced to shut down and/or scale back. This has been largely a self-mandated shutdown of the global economy.
  • The GFC became a massive economic experiment in trying out what might work to reboot an economy – in many instances, virtually from the ground up. New government oversight was implemented, new financial practices were employed, and agencies created.

One of the results: The Fed created a set of tools, e.g., Quantitative Easing (QE) that were tested for first time beginning in 2008 to bring liquidity to markets. They are using many of these same tools again to fix liquidity issues brought on by the current crisis.

  • Financial institutions are much stronger today than they were entering the prior economic downturn, and they are not the central issue or culprit of our current crisis. The GFC was an issue of trust and insolvency between financial institutions – this time we know the cause of stress and volatility in the markets right now.

We’re about to experience more than $2 trillion in economic stimulus injected (expeditiously, we hope) into our U.S. economy. This will no doubt provide a large measure of relief to hard-hit individuals, families, businesses, and corporations. It’s our deepest wish that this effort will contribute to a strong, durable, and rapid economic turnaround that future generations can learn from.

For more information or questions, please contact Halbert Hargrove at hhteam@halberthargrove.com