Don’t Apply 2008 Thinking to Today’s Crisis

Jill Carlson, a CoinDesk columnist, is co-founder of the Open Money Initiative, a non-profit research organization working to guarantee the right to a free and open financial system. She is also an investor in early-stage startups with Slow Ventures.

Yesterday, it was reported that 3.28 million Americans filed for unemployment in the past week. This number dwarfed official expectations (about one million) as well as any previous figures ever reported, including during the Great Recession.

There is also good reason to believe this number does not even capture all of those who lost their livelihoods in the last seven days. A combination of confusion, bad information and bureaucracy, coupled with the fact that many of these Americans will be filing for the first time, means the number laid off may be much higher.

Yet, in the hours after the announcement, the U.S. equities market rallied 4 percent, extending a three-day “winning streak,” as many of those in the business would call it.

But let’s be clear: There are no winners to be declared in the midst of this crisis.

President Donald Trump has been quick to express hope for a fast economic re-opening. Wall Street has been continually calling out for a “V-shaped” recovery, or a quick rebound off a bottom. A string of hedge fund managers, politicians and pundits appear on television and in our Twitter feeds daily, reassuring us of what is possible.

Financial markets, with little left to grasp onto, have clung to this sentiment. Deep breaths. It will all be okay. This, too, shall pass. Thoughts and prayers.

In 2008, banks were undercapitalized. This was really the root of the systemic failure that occurred. This time, it is hospitals that are overcapacity.

Economists, analysts and big bank CEOs tell us that there is nothing to fear because this time is different from 2008. This time there is no risk of systemic failure.

There are three points I would like to raise in light of this argument:

1. Dismissing risk of systemic failure is premature. 

Systemic failure is almost by definition hard to discern ahead of time or even in the moment. It is nearly impossible to accurately forecast the cascade of downstream effects.

Very few have the privilege of a bird’s-eye view perspective in any given crisis. We are more likely to be foot soldiers in the fog of war than generals drawing battle lines. Therefore, it is devilishly difficult to see how a systemic failure will develop and affect other parts of the system as well as other systems altogether.

Even those who are in a position to see it all often do not. Like the general in his bunker, it is too easy to become disconnected from reality on the ground.

Banks are well capitalized this time, so from the perspective of the financial system, that particular systemic risk appears to no longer be relevant. But there are plenty of other cracks that are currently coming under pressure. Notably, central bankers globally have few conventional options left to stimulate growth as they have pursued nothing but easy monetary policies for the last decade. 

2. When the foundation itself is crumbling, a cascade of systemic failures is unnecessary to bring down the structure.

It is a known phenomenon that political leaders rely on comfortable, old fashioned frameworks when confronting novel  crises. American and European leaders demonstrated this in the 1950s and 1960s, turning to World War II paradigms as they confronted a geopolitical landscape in which that thinking no longer applied. The same can be said of American leaders who responded to 9/11 by leaning on Cold War reasoning.

I believe the same is happening now with political and financial leaders in regard to 2008. “Because there is no systemic risk,” the 2008 line of reasoning goes, “the fallout will be contained.”

But when more than three million people lose their jobs in a single week, you don’t need systemic risk to see unmitigated fallout. This may not be a financial crisis, but it is certainly an economic crisis.

3. Just because systemic failure is not occurring within the financial system does not mean it is not happening.

Just look at the health care system.

In 2008, banks were undercapitalized. This was really the root of the systemic failure that occurred. This time, it is hospitals that are overcapacity.

The overwhelming number of severe cases of coronavirus is overwhelming hospital resources around the world. Ventilators, personal protective equipment and health care workers themselves are suddenly in very short supply. This affects not only COVID-19 patients but all those who need medical attention for any reason. Pregnant women, gunshot victims, kids with broken wrists, older folks with a bad case of the run-of-the-mill flu all get affected. There’s your systemic failure.

I generally subscribe to the old adage that the most dangerous words in investing are, “This time is different.” But this time really is different from the last crisis we saw. It is so different, in fact, that we cannot take refuge [in thinking] that it does not look like 2008. That reality should not be used as a salve or a comfort but should be taken as a warning to us. If it did look like 2008, at a minimum we would be dealing with a known. Instead, we are confronting the unknown, and all of the unknown unknowns that go along with that.