The 2008 Crisis and its Relevance Today

The Start of the Financial Crisis

The 2008 financial crisis started when housing prices started decreasing and the housing bubble burst. A bubble occurs when there is an unjustified and collective belief that prices will rise, resulting in broad-based demand for that asset and consequently rising prices.

The Road to Recovery

The financial crisis hit the economy mainly through the financial panic and credit crunch channels. In other words, runs and relayed events disrupted the financial intermediation and limited the willingness of banks and investment banks to supply credit. The government took many measures to address this channel through which the financial crisis affected the economy. First, the Federal Reserve opened many liquidity facilities to ensure that banks would still provide credit and avoid further fire sales. In addition, to calm money market mutual funds the government provided them deposit insurance. Furthermore, the government introduced stress tests and, although most investment banks failed them, it calmed markets since it was a first attempt to measure the risk in the market. Lastly, the government introduced several rounds of quantitative easing (QE) and forward guidance. During the crisis the nominal interest rate hit the zero lower bound and the Federal Reserve used quantitative easing (asset purchases by central banks) and forward guidance (communications about monetary policy of the future) to lower the interest rate more and stimulate the economy.

What role does fiscal stimulus play during the pandemic vs in the 2008 financial crisis?

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HerCapital is not a registered investment, legal or tax advisor or a broker dealer. All investment / financial opinions expressed by HerCapital are intended as educational and reflect the personal research and experiences of the team. HerCapital holds no responsibility or liability for any errors, losses or damages incurred as a result of any individual actions based on the provided information on any of our communication platforms or events.