Tale of the Tape: Lessons from the 2008 and 2020 Financial Crises

52 Pages Posted: 21 Jul 2021

See all articles by Mark E. van der Weide

Mark E. van der Weide

Board of Governors of the Federal Reserve System

Jeffery Y. Zhang

University of Michigan Law School

Date Written: June 1, 2021

Abstract

In the decade-plus following the 2008 global financial crisis, the United States experienced steady economic growth that evolved into the longest expansion in the country's recorded history. It's fair to say that very few people expected a pandemic to end the run. COVID-19 upended life as we knew it in 2020, and the economic fallout was catastrophic.

In this Article, we examine these two historic episodes in order to tease out important lessons for policymakers. These lessons are derived by analyzing the key similarities and differences between the global financial crisis and the COVID-19 crisis. The similarities include the reaction of market participants to the source of the contagion, the increased demand for U.S. dollars, the withdrawal of investors from short-term funding markets, the actions of the Federal Reserve to backstop financial markets, and the significant announcement effect of the government’s plans to intervene. The differences include the type of shock, the unprecedented lack of liquidity in the U.S. Treasury market in March 2020, the speed and nature of the government response, and the diverse trajectories of the economic crash and subsequent rebound.

Through this compare-and-contrast exercise, we observe that the following lessons are worth keeping in mind as policymakers work to reduce the incidence and severity of future financial crises:

1. The type of shock matters to the speed and manner in which financial contagion materializes.
2. Investors will fire sell assets in a crisis because cash (and specifically the U.S. dollar) is king when market volatility spikes.
3. Short-term funding markets are fragile, typically the first to dislocate in a financial panic, and systemically critical.
4. The government’s response to an incipient crisis should be aggressive in both size and speed.
5. The central bank’s role as lender of last resort is crucial in quelling a financial crisis.
6. The government often can calm market jitters by simply announcing credible support mechanisms.
7. Having a banking sector that is a source of strength makes a tremendous difference.

Policymakers cannot predict the timing or contours of the next crisis with certainty. But bearing these lessons in mind, they can act in a way that will mitigate the harm caused by that crisis.

Suggested Citation

van der Weide, Mark E. and Zhang, Jeffery Y., Tale of the Tape: Lessons from the 2008 and 2020 Financial Crises (June 1, 2021). 26 Stanford Journal of Law, Business & Finance 413 (2021), Available at SSRN: https://ssrn.com/abstract=3862189

Mark E. Van der Weide

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jeffery Y. Zhang (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

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