Crisis Management: The 2008 Financial Crisis and the Present COVID-19 Crisis

Crisis Management: The 2008 Financial Crisis and the Present COVID-19 Crisis
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Crisis Management: The 2008 Financial Crisis and the Present COVID-19 Crisis
The 2008 Financial Crisis
It has been over a decade since the most significant financial recession of recent times. The financial crisis which began in mid-2007 escalated from a burst in the real estate and more so, the housing bubble in the United States (U.S.) to be one of the worst recessions the entire globe experienced in more than six decades (Islam & Verick, 2011). Initially, it was an isolated event, which could be regarded as mild instability in the sub-prime segment of the country’s real estate sector (housing market). However, it was underestimated as it led to the fall of major institutions such as the Lehman Brothers and more surprisingly, the collapse of national economies such as Greece (Mitsakis & Aravopoulou, 2016). The Lehman Brothers’ bankruptcy conveyed that there was more to the story beyond the implication of poor incentives, which were provided as the primary reason for the financial crisis.
Loose Monetary Policies
Besides the poor incentives from financial incentives, the Federal Reserve (Fed) accounts for a considerable share of this problem for the loose monetary policies. These policies trackback to 2003-2005 and were the major reason that the bubble was that extreme. Over the turn of the 21st Century, two major events occurred on American soil that was directly linked to the economy. First, there was the collapse of the tech bubble in 2000. The following year, 2001, the country experienced the 9/11 terrorist attacks. In the quest to avoid a recession as a result of these events, the Fed slashed interest rates to extreme levels of 1% (Allen & Carletti, 2010). At the same time, housing prices were rising steadily. A decrease in interest rate was a major incentive as it gave people significant borrowing powers. Consequently, they would purchase houses whose rates were going up rapidly. Public policies such as tax advantages including deductible interest on mortgages encouraged people on the lower economic spectrum to buy houses. Demand for houses rose profoundly. Even though the Fed began raising interest rates in June of 2004, people continued borrowing as lending rates were much lower relative to the appreciating of houses until 2006.
Progressive Interest Rates institutionalized by the Fed (Islam & Verick, 2011).
In this regard, the first factor that contributed to this course was the Fed’s low-interest-rate policy. The same factor was apparent in Spain and Ireland thereby justifying the bubble witnessed in these countries (Taylor, 2009). Similarly, these countries had loose monetary policies.
Global Imbalances
Global imbalances earmarks as the second most influential factor in the ensuing asset bubble prices and therefore, financial crisis. Global imbalances facilitated the growth in credit. In essence, this factor is one complex issue implying that the research will borrow a leaf from the Asian crisis of 1997, which comprised of Indonesia, Thailand, and South Korea. South Korea for instance, had borrowed substantial foreign currency compelling them to turn to the International Monetary Fund (IMF) for assistance. The institution demanded that the debtor cut government spending and raise interest rates, which is the polar opposite of what European and the U.S. have done when in similar circumstances. In essence, this move was political in play as the IMF and the World Bank are mainly European- and American-dominated institutions. Asian countries lack high-ranking representatives in these institutions meaning that they lacked much influence in the governance process. The harsh policies were results of this position.
Economic independence was the only fulfilling situation for Asian countries and one that would alleviate their need for IMF. They achieved this via accumulating trillions of dollars of assets. On the other hand, their counterparts in Central and Eastern Europe as well as Latin Americans never increased their reserves. China, a robust and emerging economy, saw the level of risk at sight and became the largest holder of reserves. They were never affected by the Asian crisis but noticed the risk of relying on the IMF. Besides this and probably the most important reason was to prevent the strengthening of the Chinese yen, which would damage its exports. By the third quarter of 2009, Chinese reserves stood at $2.273 trillion. It gives China a major political influence. One possible they did this was through was firms’ equity.
Having circumvented this challenge, the U.S. authorities prevented, particularly, Chinese to buy corporations. An example is a failure to buy out Unocal Corporation because it is a strategic firm (Casselman, 2007). There are other several examples. This challenge called for deviation from the Chinese authorities resulting in their investment towards debt instruments. These included Fannie and Freddie mortgage-backed securities as well as significant chunks of Treasuries among other debt securities. The availability of astronomical volumes of debt was fundamental in driving down lending standards guaranteeing sufficient demand for debt from house buyers as well as other economic players. Conclusively, the case for debt instruments coupled with loose monetary policies was crucial in contributing to the bubble.
The U.S. Countermeasures to the 2008 Financial Crisis
In response to these circumstances, various agencies had to purport appropriate measures. The U.S. Federal Reserve sought to guarantee that there was no financial meltdown through aggressive quantitative easing. It sought to use its asset side of the balance sheet using major policy tools such as buying longer-term securities, offering liquidity directly to crucial credit markets, and lending to the nation’s financial institutions. The Fed claimed that these policies were vital in pushing in the continued efforts to push down interest rates as well as relax credit conditions that were prevailing in the market. These procedures were articulated even though “the federal funds rate was close to its zero lower bound” (Mohan, 2009, p. 26). This approach is one the Fed referred to as “credit easing” instead of the widely frequented “quantitative easing.”
The similarity between the two is that both encompass the expansion of the respective institution’s balance sheet. However, pure quantitative easing focuses on the number of bank reserves, which translate to loans and securities that are present in the central bank’s balance sheet and on the asset side are incidental. On the other hand, the Fed’s credit easing approach places a detailed focus on both loans and securities and how they affect credit conditions for microeconomic players (in this case, households and businesses) (Bernanke, 2009). Following the actualizations of the countermeasures, the economy witnessed its monetary base double between June 2008 and December 2008. Nevertheless, a mere increase of 6% was noted in both money supply and b...