Cost Implications of the Great Lockdown due to the Novel Coronavirus Outbreak

Abstract

When the global economy hit the wall in 2007-08 (i.e. sub-prime mortgage debacle in 2006 followed by the 2008 global credit mayhem, originated in the U.S. before spreading to Europe as sovereign debt crisis), an extensive research by economists, scholars and academia compared and contrasted the Great Recession of 2008 with the Great Depression of the 1930s. Both crises were the byproduct of the endogenous risks plus banking systems both times were at the epicenter the crises as first line of defense. But this time is different, COVID-19 health crisis is in systemic nature but it is exogenous to the global banking system; therefore, the Fed using the same old policy remedy (i.e. injecting massive amounts of liquidity) will not work in the fight against the Great Pandemic. Since the Great Recession, systemically important banks worldwide have strengthened their capital positions substantially and as a result they are significantly more resilient to exogenous shocks. However, under an extreme but plausible scenario of a second or third wave of COVID-19 resurgence beyond 2020, most economies including the world’s biggest economy will be thrown into a state of coma, and then even ventilators will not help them survive.

Keywords: COVID-19; Coronavirus; Pandemic; Cost Implications; Credit Expansion

JEL Classification: O31, G12, E42, C40, Q32, Q54, H23