Why It's Different This Time

The other day I completed a survey for my brokerage company, and one of the questions they asked was, "Is the current crisis worse than the 2008 financial crisis?" A couple of months ago, when our state and region were mostly in lockdown, I would have answered with a resounding and unhesitating, "Yes!"

Now I'm not so sure. Admittedly, I don't live in one of those states where the virus is now spiking, and things here are close to back to normal, so maybe my vantage point is too subjective. Nevertheless, I would have to say this crisis is far from as bad as the previous one, which may explain why the stock market has behaved the way it has, namely prices are off only a little from where they began the crisis, with only that short, sharp drop in February and March.

One reason, of course, is that the economy, as a whole, has rebounded strongly over the past couple of months as most of the country has reopened, at least to some degree, even as millions of people continue to work remotely. But the main reason is that that the lessons we learned from 2008 have been brought to bear in this crisis, namely that the government and the Federal Reserve have thrown much more money and resources at the problem than they did 12 years ago, which has mitigated the damage to a great degree.

As we've seen in the second-quarter earnings reports released so far by the big banks, the measures taken after 2008 to make sure they've built up enough capital to withstand another global crisis have paid off. Other than Wells Fargo (WFC) – which is still in the Fed penalty box, forbidden to grow assets – which reported a big loss, the other big banks reported flat Goldman Sachs (GS) or reduced JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) earnings compared to a year ago. It could have been a lot worse. Who would have thought they'd be able to pull that off three or four months ago? Let's give the Dodd-Frank Act and Fed capital requirements the props they deserve.

That doesn't mean we're over the hump. Wells, JPM and Citi collectively provisioned $28 billion for future loan losses (on top of what they put aside in the first quarter), which was the main reason for their Q2 earnings hits. "We don't know what the future is going to hold. This is not a normal recession," JPM CEO Jamie Dimon said as the bank announced a 51% drop in net income, mainly due to a record $10.5 billion in loan loss provisions.

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Indeed, there is a great divide on what the economic future holds, no more so than at the Fed.

On the bearish side, we have Fed governor Lael Brainard. "Difficulty suppressing the new coronavirus will pose substantial risks for the U.S. economy, including a possible double-dip in economic activity," she said, warning "that the nation faces a long, slow recovery even if those hazards are avoided. The recent resurgence in COVID-19 cases is a sober reminder that the pandemic remains the key driver of the economy's course. A thick fog of uncertainty still surrounds us, and downside risks predominate."

But James Bullard, the president of the St. Louis Fed, was a bit more sanguine, saying that "as the economy adapts to the coronavirus pandemic, a solid recovery and a substantial decline in what is now a very high unemployment rate are both possible. The macroeconomic news for May and June, reported with a lag, seems to suggest that April will prove to be the lowest point of the crisis," he told the Economic Club of New York.

John Williams, the president of the New York Fed, speaking the prior week, agreed with Bullard that the recent economic data may "indicate that we've likely seen the low point of the downturn and that the overall economy has begun to recover." However, he also warned that "the economic outlook remains highly uncertain and it's going to take considerable time to restore the economy to its full potential," adding that "the economy's fate is inextricably linked to the path of the virus."

It's certainly a good thing that we have a difference of opinion on the Fed. Smart people are allowed to have differing opinions and proposed solutions on things (journalists take note). However, at the end of the day, does it really matter? The fact is that, whether or not the crisis may be getting worse, as Brainard believes, or that the worst is over, as Bullard and Williams seem to think, the prescription is going to be the same, and that's going to be good for businesses, consumers and the financial markets.

Already Washington is talking about the next round of rescue and stimulus measures. Even more, help is on the way. For skeptics wondering why the stock market is still rising while the virus is still spreading, that's your answer.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

2 thoughts on “Why It's Different This Time

  1. ".....the government and the Federal Reserve have thrown much more money and resources at the problem than they did 12 years ago, which has mitigated the damage to a great degree."

    They have mitigated the short-term damage at the price of fatally undermining the economy in the long term and setting up the preconditions for an even bigger crisis down the road.

  2. Yes, the “markets” have recovered nicely. We can all interpret that miraculous rebound any way we like. How about the general economy? The Atlanta Fed publishes its weekly take on GDP growth (GDP Now) and over the past ten weeks it has been running at -40%. This pandemic story is far from over.

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