Question

Describe some differences between the 2007-09 Financial Crisis and the current Coronavirus Crisis.

Answer 1

Some differences between the 2007-09 Financial Crisis and the current Coronavirus Crisis. :-
Ans : While comparisons will be made between the coronavirus crisis and the 2008 crisis, But they are different, viewed through the lends of exogenous and endogenous risk. Hence the responce of policy should be different. As like, financial crisis 12 years ago in 2007-09, Coronavirus is having a strong impact on the world economy.
Obviously there are similarities : Major bankruptcies, Shortage of Liquidity, Major losses and certain financial instituations can be failed.

By using the endogenous risk lens, we can compare and contrast the coronavirus crisis with 2008, and gain some understanding about the possibility of a systematic crisis as a result of COVID 19 in the process.

2008 was a typical endogenous risk crisis, how !

At its center, the financial event in 2008 was caused by the involvement of market participants, who came to doubt
assumptions that had normally been made almost without question. The result was mutual decisions to sell similar
assets and avoid the same risks, which created an acute liquidity shortage.
The crisis caused due to the financial system 's weaknesses :
1. ill-advised and poorly risk-assessed structured credit products,
2. significant maturity mismatches,
3. illusionary bank resources,
4. regulatory uncertainty,
5. comprehensive regulatory arbitration, and
6. significant off-balance sheet obligations.
In the meanwhile, the mechanism was endogenous.
Before these crisis, market participants all had infinite liquidity as an unrealistic core idea and when the market questioned this theory, liquidity evaporated and a crisis resulted.

Coronavirus Crisis. (COVID 19) Why, What..!!

The coronavirus shock is, of course, purely exogenous to the global financial system.Now most common question is whether the financial system absorbs this shock, as it usually does for exogenous shocks, or whether the shock adversely interacts with the financial systems latest feedback loops and exposes existing vulnerabilities which culminate in a systemic financial crisis.

Comparison between the coronavirus crisis and the global systemic crisis of 2007-09 is inevitable, but seen through the lens of exogenous and endogenous risk they are quite different in itself.

Global finacial crisis of 2007-09 : In 2007-09 was a global financial economic crisis fuelled by endogenous market participants interactions. The crisis forces fed on the financial system's deep weakness which had been built up out of sight.

COVID 19 Crisis : COVID 19 is an exogenous shock to the economy and the questions is whether it has enough latent weakness to prey on. I Specifically think this is unlikely. Alternatively, the locus of the issue lies outside the financial sectors, in real economy where the Govt. intervention to close stores, utilities and enterprises and the income of the workers involved is declining.

That, means that the correct policy response can not be limited to the interest rates or purchases on the open market of corporate or sovereign bonds, but should also include forbearance and targeted assistance and similar policies.

With the financial system's most vulnerable part the banks in much better shape now than in 2008, i think better feel that this is not the real time problem and that any solution focused primarily on the financial system would fail.