Macroeconomics differences of 2008 financial crisis and 2020 economic crisis

Question

How is 2020 financial crisis different from 2008 financial crisis? For example, why have stock market indices (e.g. S&P500, NASDAQ-100) recovered so quickly (about 3 months instead of longer than a year during 2008 financial crisis) despite the fact that unemployment rate is higher now and there were no lockdown back then?

Answer 1

There are a lot of differences between the two crises + how these differences manifest in the stock market.

First, on the point of the stock market- it's "kinda" an indicator of the overall economy. However, it's not a perfect metric; really, it reflects the weighted sentiment of those who participate. Furthermore, the stock market is more akin to a leading economic indicator, in that it predicts the future. In contrast, GDP is a lagging indicator and has taken a severe hit. Thus, people who participate in the markets are overall confident that the economy will rebound after COVID ends, in spite of hits to GDP.

This optimism is driven by a few factors that differ from the 2008 crisis:

• Fiscal policy has been strong and immediate - PPP + other stimulus has passed rapidly and in huge volumes. The CARES act was almost \$2 trillion (compared to the 2008 fiscal support of $800 billion).
• Expanding role of monetary policy - while monetary policy has greatly supported banks, the Fed has also directly supported businesses with loans and injections into specific capital markets. This is a huge expansion compared to the 2008 financial crisis
• There are no obvious systemic failures in the financial system - yes, some banks are under stressed by non-performing loans, but the monetary and fiscal policy has both helped banks. Furthermore, stimulus has mostly been saved, meaning that banks have even more capital.

Even though the stock market is high, this is not necessarily a guarantee of future macroeconomic stability - there are rising concerns of exploding corporate and sovereign debt, trade tensions, collapsing supply chains... there are still many risks that will need to be addressed. Additionally, some characterize Wall Street as being "disconnected" from Main Street, again related to the fiscal/monetary policy described above.

Main takeaway: the performance of the stock market does not mean households and individuals are also doing well during the crisis.

Answer 2

I will focus on macroeconomic differences between the two crises as why stock markets recovered so quickly is rather speculative and would involve a lot of opinions which is not on topic here.

From macroeconomic perspective the Great Recession that started with 2008 financial crisis was mainly a demand driven recession. The problem in 2008 was that there was a lot of credit driven consumption (especially in housing market) that stopped once housing bubble popped (see for example Giroud & Mueller (2017), Mian & Sufi (2010) or Eichengreen's Hall of Mirrors provides good non-technical account of the Great Recession).

The current Covid19 recession is mostly supply driven and to a considerable extent self-imposed by the lockdown which does not allow firms to actually produce even if they wanted. It also has a demand component as people would be most likely scared to go to restaurant or big public places, but as experience of countries that did not locked down show economic activity would not drop so much (albeit arguabely at a cost to the public health). It is also possible that in the future the current supply shock will lead to demand slup (see Fornaro & Wolf (2020)) but the supply shock is arguably one of the main drivers of current crisis.