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The False Crisis Comparison

During the 2008 crisis, unprecedented actions by the US Federal Reserve were both appropriate and decisive in addressing the primary source of the shock: a devastating blow to the financial system. In the COVID-19 crisis, the Fed cannot play the same role, because it is addressing the financial repercussions of a shock to the real economy.

NEW HAVEN – In an effort to get a handle on the economic and financial consequences of the COVID-19 pandemic, the first instinct is to search for precedents and remedies in earlier crises. Many have pointed to the 2008 global financial crisis (GFC) as the most relevant example, especially in the aftermath of the extraordinary monetary-policy actions announced by the US Federal Reserve on March 15. That would be an unfortunate mistake.

What worked 11 years ago won’t work today. The COVID-19 pandemic is the mirror image of the GFC. The policy response needs to be crafted accordingly.

The GFC was, first and foremost, a financial shock that took a severe toll on the real economy. COVID-19, by contrast, is a public-health crisis. Draconian containment efforts – lockdowns, transportation bans, and restrictions on public assembly – are producing a shock to the real economy, with devastating consequences for businesses, their workers, and the financial sector.

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