The Coronavirus Bailout: Lessons From the 2008 Financial Crisis

The coronavirus bailout and the 2008 financial crisis share some similarities, but they also differ in significant ways. While some argue that the 2008 bailout was flawless, the 2020 response has its own set of issues that warrant detailed analysis.

The Assumptions Behind 2008 Bailouts

The first mistake in comparing the 2020 and 2008 bailouts is the assumption that the 2008 efforts were riddled with mistakes. Indeed, if one accepts the necessity of government interventions during financial crises, the 2008 bailouts were executed flawlessly. They: Stabilized the financial markets and stopped the contagion Recouped the government’s investment when the bailout money was repaid Generated profits for the government instead of creating a financial burden It's rare for a government program to achieve such comprehensive success, making the 2008 bailouts a model for effective intervention.

Comparing 2008 and 2020 Bailouts

The core differences between the 2008 and 2020 bailouts are stark. Unlike the 2008 crisis, which originated within the financial sector, the 2020 pandemic primarily affected production and consumer confidence. In 2008, the focus was on preventing the financial contagion through loans. In 2020, the response shifted towards providing direct support to individuals through non-repayable grants.

Key Differences

The 2020 bailout includes a significantly larger scale of financial support. Additionally, the government does not expect to recover the funds distributed, and the money went directly to individuals rather than businesses. These differences can be justified by the distinct nature of the economic crisis in 2020.

Repeating Mistakes: The Coronavirus Bailout

While the mechanisms used to stabilize the markets in 2020 were effective, the approach still repeats some of the shortcomings seen in 2008. The 2020 bailout favors those with existing advantages, such as large corporations and tech platforms, while at the same time disadvantaging average workers and college students.

Key Fairness Issues

For instance, the government granted U.S. farmers over $30 billion in aid, a move that explains the Midwest’s overwhelming support for Trump's re-election. Over the first two months of 2020 alone, the Federal Reserve injected $450 billion into financial markets, leading the Dow Jones Industrial Average to break its record, passing 30,000.

The Impact of Government Support on the Stock Market

The rise of the Dow Jones to 30,000 during a period of economic decline is a stark reflection of government support rather than an indicator of improved economic performance. Similarly, the student loan debt has surpassed $1.5 trillion, mirroring the untouched $1 trillion in student loan debt during the 2008 bailout.

Comparative Analysis

The comparison between 2008 and 2020 highlights the disparate impacts of government bailouts. In 2008, despite financial losses, banks rewarded themselves with bonuses. In 2020, the focus on individual support suggests a shift from corporate to personal needs, but with similar outcomes in terms of financial benefits.

Conclusion

The coronavirus bailout, while addressing immediate needs, reflects the shortcomings of the 2008 approach. Understanding these differences can help shape more equitable and effective future interventions. As the world continues to grapple with the economic impacts of the pandemic, it is crucial to learn from past mistakes and avoid repeating them.