Abacus: 2008 and 2020: Comparing Two Recessions

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As the United States economy attempts to recuperate from its dreadful state, one that was brought about by the COVID-19 pandemic, many economic pundits have taken careful note of key metrics concerning the economy, comparing them to those from the last recession. Much of the data collected by government agencies and private financial institutions that show the changes in the unemployment rate and growth rates in output and income have portrayed a grim outlook for the economy, even surpassing the dire consequences of the 2008 financial crisis.

Indeed, commentators have observed that the swift nature of the current recession has been even more drastic than that of the last, with the unemployment rate rising more than four-fold from February to April, increasing from 3.5% to 14.7%. As damaging as the late 2000’s was for millions of Americans, the unemployment rate only steadily rose across more than two full calendar years, eventually reaching a peak of 10% in October 2009.

Despite all the figures a statistician could gather, or all the hyperbole news media may use to describe the terrible state of affairs that Americans have found themselves in during each of the last two recessions, it is not quite fair to compare the two periods to one another. Like most recessions, they are alike in certain regards. Most notably, the origins of each featured a shock to demand across the nation, affecting the prospects for consumer purchases and firm investments (in 2008, a collapse in the housing market represented a blow to financial intermediation; a dozen years later, a deadly virus shut down much of the globe).

But the dynamics of the two downturns are quite contrastable, with each time frame offering a unique exposure to how a nation as big as the United States could fall from grace. While a single event like a deadly disease or a terrific terrorist attack could certainly impair an economy, recessions typically occur from business- and market-related issues. High interest rates that discourage borrowing, a trade war that hurts international commerce, and destabilization of a banking system can all give rise to a slump. The latter of these causes were instrumental in the financial meltdown of twelve years ago.

One of the largest asset price bubbles in modern American history was that of the real estate market in the 2000’s. Both cultural influences and economic policy contributed to surging home prices: one of the many points of achievement for George W. Bush in his first term as president was increasing home ownership’s rates among Americans, with more than 69% of occupied households being owned at one point in 2004.

Bush helped push laws that increased home ownership, including the “Zero-Downpayment Initiative”, which allowed the Federal Housing Administration to grant mortgages to first-time home buyers who didn’t have a down payment.

Moreover, the Federal Reserve kept interest rates at low levels during the first half of the 2000’s, as the central bank seemingly became risk-averse with regards to monetary policy following a recession in 2001: between December 2001 and October 2004, the effective federal funds rate did not eclipse 2%.

The times influenced an appreciation for real estate; with more money being invested in housing projects and it becoming easier to be approved for a mortgage, housing prices surged: from the beginning of 2000 to March 2006, the S&P/Case-Shiller National Home Price Index increased more than 83%.

The high number of individuals who were permitted housing loans in spite of having low-income jobs or little money put away in savings was perhaps the biggest indication of a bubble, one that was partially contributed to by speculators hoping to profit off increases in home prices. In particular, a clever and ambitious person with sufficient means could purchase a property in an area where they expect prices to continue to rise in the short-term. They may fix up the house to better enhance its amenities, and sell it for a gain in a few short years or even months.

Like other bubbles, such as the credit-driven economy of the 1920’s, and the technology-backed business rise of the 1990’s, the influx of money into homes was not endless. As speculation winded down and selling continued, home prices took a dive. With the financial world heavily reliant on the real estate market, as many investment banks and underwriting firms developed securities derived from mortgages, the banking system collapsed concurrently with housing values.

As momentous as the financial collapse of 2008 was, it can be regarded more closely as a “typical” sequence of events leading to a recession, one in which an under looked asset bubble was the origin of.

There was no such bubble preceding the current recession. Though the economy was enjoying its longest economic expansion in the nation’s history, few economists were wary of any asset overvaluations, much less in comparison to the magnitude of the housing bubble of the 2000’s.

Rather, the effects of COVID-19 on the economy are more analogous to an event like the September 11th terrorist attacks, if such an incident could be extrapolated over the course of several months on an entire country. Indeed, 9/11 had a tremendous short-term impact on the New York City economy, with the attacks accounting for the losses of some 143,000 jobs per month in the city over the ensuing three month time frame.

Yet, one of the advantages that an economy has as a result of a single event-induced recession over that of one led on by a bubble burst pertains to its capability to recover: given that the economy was operating in full form just prior to the pandemic, it would be rational to assume that, as lockdowns begin to shift and businesses start to reopen, there would be an accelerated recovery. Indeed, data compiled by Bloomberg show a number of improving aspects in the United States hinting at a regaining economy, including greater consumer demand for mortgage applications, an increase in restaurant reservations, and more purchased airline tickets in the months following the worst of the pandemic.

By contrast, as the banking system struggled to acquire greater amounts of capital following the 2008 collapse, many indicators pointed to a slow and inconsistent recovery for the United States. The Bureau of Labor Statistics reported in 2014 that, due to cutbacks in income, wealth, and confidence, consumers strongly reduced their consumption following the recession, leading to sluggish employment and weak growth rates for several years.

In essence, a trade-off may exist between these two types of recessions: one tends to be more punishing in the short-term, especially for a country’s poorest citizens, but the pain could quickly be alleviated; the other would be comparatively long and sluggish. Obviously neither scenario is ideal, and while it might be difficult to be optimistic about any sort of downturn, the current situation could be far more abysmal than it actually is.