scout1 wrote: ↑Thu Jun 10, 2021 10:16 am
A question I ask myself is: why was the financial crisis so much worse (on an economic level) than the global pandemic? A time when economies around the world just stopped producing for an indefinite amount of time should have resulted in higher and longer lasting unemployment and much more economic pain than a few midsized banks failing. The answer, I believe, is the response of the Fed and the rest of government. If the Fed and policymakers can help make a global economic shutdown only a modest blip in people's economic livelihood, than it should have no problem addressing any smaller problems. And I believe most causes of recession are smaller than a global economic shutdown.
An obscure Austrian bank, CreditAnstalt, brought down the world trade and finance system (1931). Countries literally stopped being able to pay each other.
A mid sized investment bank, Lehman Brothers, nearly caused a chain reaction of defaults across the planet.
Think about what economic activity would have been 3-4 weeks later had Royal Bank of Scotland failed? And there were plenty of political pressures not to bail it.
But the actual liquidity freeze was well entrenched by then. If you were a company, and you went to your bank, you could not borrow money. Companies were in fact prevented from drawing down their Revolving Credit Facilities - previously agreed, legal contracts between banks and their clients. Read up on the dreaded Material Adverse Condition/ Change clauses. Companies like GE & Ford were ringing the US Treasury and telling them they could not meet their payroll at the end of the month.
There's an argument of about the legality of what the US Treasury actually did. I think a subsequent court decision ruled that it could not do so in the future.
The real saving action, though, was the NY Fed providing swap lines (liquidity facilities) for Eurodollars - the banking system in Europe runs a permanent dollar deficit (the banks always have fewer dollar depositors than they have need for dollars to finance the global trade of European clients). So in fact the entire European banking system was in trouble.
Banks create money by the business of loaning deposits. That's called the money multiplier. It works in reverse if loans are called in due to deposits flowing out. An explosive collapse of money supply will lead to a severe drop in real economic activity (think Argentina when it de-dollarized).
So the link between the money markets and the real world was there, and the threat. It was the British government's decision to stand very publicly behind its banks which turned it. That and the NY Fed acting behind the scenes to keep the Eurodollar system liquid. Gordon Brown's speech was no great shakes but could be summarised as "Things are bad. They may get worse. We shall do what is necessary [to preserve the banks]. If that is insufficient, we shall do more". You could almost hear the Spitfire engines thrumming into life on those summer mornings in Kent... or to quote one NY columnist "Did Gordon Brown just save the world?"
I must admit the downturn of 1980-81 felt worse, and certainly unemployment was c 12% from memory (Canadian unemployment was quite a bit higher than US unemployment, though, so memory conflates). I just happened to be looking for a job, so, to quote Walter Matthau (looking for a job in the movie "Survivors"): "Am I veteran? Yes. The Big One. Korea.... well, it was big for me".
And the Oil Crisis (1973-74) also felt pretty bad - fist fights at gas stations etc. But there was a lot going on then, Watergate etc. Stagflation. A general sense of things unravelling.
The current recession is a strange one. GDP fell not because people didn't want to spend money, but because there wasn't money to spend things on. Savings rates soared. In varying amounts and with uneven dispersion, people who were forcibly idled received compensation from their governments, ditto corporations. There wasn't a huge wave of insolvencies - either of people or of companies.
Whilst this was a huge test of our political systems, our medical and public health resilience, our social safety nets, it has not been like an ordinary recession.