Recovery from the 2008 Financial Crisis and the potential effect of the COVID-19 pandemic

In my previous post I discussed how the 2008 financial crisis affected several different countries around the world. In my analysis I discovered that the world economy in general was hit severely and it would require severe action to restore the economy to its previous state. I have previously discussed how the US government injected $700m into the economy to begin the process of recovery, however this was only the beginning of the recovery process. In this blog I will look into the recovery paths for several countries that helped to build the economy back up. I will also discuss the affect of the current COVID-19 pandemic on the economy and whether I believe the financial burden from it could cause another financial crisis in the not so distant future. 

In the UK the financial crisis hit the economy hard, specifically the banking sector, as a means of recovery the UK bailed out banks such as Northern Rock. In the US however, they didn’t bailout the Lehmann Brothers firm and it collapsed which caused major problems in the US financial industry. Pettinger (2019) states that “After the panic this created, governments realised they couldn’t allow a repeat of this experience”. 

As well as government bailouts, the UK also slashed interest rates from 5% to 0.5%. The reason behind this cut was that low rates spur businesses to make new investments and spur people to buy houses or invest, however this did not have the effect it was expected to have. In reality countries such as the US and the UK were looking for a quick fix to a massive financial problem, however a ‘quick fix’ wasn’t possible. Euromonitor International (2014) state that “Reversing the loss of capital would require several years of an investment boom, but such a boom is highly unlikely”. It is clear to see that the recovery from the financial crisis is an extremely slow process due to how badly the world economy was effected and some of these effects are still being felt today 13 years on. 

Could the current COVID 19 pandemic cause another financial crisis?

The current COVID 19 pandemic has swept the globe causing economic unrest for many people and many businesses, the current situation in nearly every country in the world has caused fear and lack of confidence in the financial industry and the uncertainty surrounding a timeframe for a return to normality has caused many businesses to crumble. The 2008 financial crisis and the current pandemic have a few similarities, one of these is highlighted by Lustig (2020) who state that underestimation, denial and unpreparedness was prevalent in both scenarios as “in both of these cases policymakers initially played down the gravity of the problem”. 

The COVID-19 pandemic has severely damaged the world economy and it is important that the governments react now to encourage the economy to bounce back, however there will always be a possibility of a financial crisis occurring, Germany’s Bundesbank President Jens Weidmann (cited by Shalal, 2018) stated that “Governments cannot completely prevent a repeat of events like the 2008 global financial crisis even though regulations have been tightened”. Therefore, it is clear to see how fragile the financial system is around the world and that a collapse could always be around the corner.

In my next post I will discuss the emergence of cryptocurrency such as Bitcoin and its effect on the financial industry. Thank you for reading and I appreciate any feedback.

Lustig, N., 2020. How COVID-19 Could Be Like the Global Financial Crisis. [Blog] Centre for Global Development, Available at: https://www.cgdev.org/blog/how-covid-19-could-be-global-financial-crisis-or-worse [Accessed 12 March 2021].

Pettinger, T., 2019. The great recession 2008-13 - Economics Help. Economics Help. Available at: https://www.economicshelp.org/blog/7501/economics/the-great-recession/

[Accessed 15 March 2021].

Shalal, A., 2018. 'Illusion' to think states can completely prevent financial crises: Weidmann. U.S. Available at: https://www.reuters.com/article/us-financial-crisis2008-weidmann/illusion-to-think-states-can-completely-prevent-financial-crises-weidmann-idUSKCN1LW0M3

[Accessed 12 March 2021].

Euromonitor International, 2012. The Recovery from the Global Financial Crisis of 2008: Missing in Action. Available at: https://blog.euromonitor.com/the-recovery-from-the-global-financial-crisis-of-2008-missing-in-action/ [Accessed 15 March 2021].