Despite being a political appointment, the Reserve Bank of India has been blessed with some illustrious Governors at the helm. Dr Duvvuri Subbarao was one of them. In this oped for the Indian Express, he does a compare and contrast with the current Covid driven financial crisis to the subprime mortgage led Global financial crisis of 2008. Dr Subbarao would surely know a thing or two about crises, what with his remarkable stint as the Governor beginning and ending in crises. He took charge of the RBI literally a week before Lehman went bust and his tenure ended right at the peak of Bernanke’s taper tantrums of 2013.
He highlights four differences between the current crisis (he calls it the CFC) and the 2008 GFC. First, the source of the crisis – GFC had its origins in the financial system spreading to the real economy whilst CFC has it the other way round. “This route of transmission — financial to the real economy or vice versa — has implications for crisis resolution. The central challenge in the resolution of the GFC was to restore faith in the financial system, which meant rescue and rehabilitation of banks and other financial institutions. Once that task in the financial sector was accomplished, repair of the real economy fell in place. Demand came back, supply resumed and growth picked up.
In contrast, the central challenge in the resolution of the CFC is to beat the pandemic, and that solution has to come from science. Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies. We are, of course, seeing that even during this crisis, just like in 2008, governments are coming out with fiscal stimulus packages and central banks with monetary stimulus packages. But these are not solutions to the pandemic; they are just holding operations till the central problem is resolved.”
Second, whilst the GFC affected global financial systems, fixing the US financial system was sufficient to bring stability across the world. However, for the CFC, every country needs to be Covid free for the world to be safe. “Every country needs to control the pandemic within its borders. But that is not sufficient because the virus can hit back from across the border. In other words, rich countries are not safe until poor countries are safe too. And no country is safe until every country is safe.”
Third, during the GFC, all measures to tackle the crisis were in sync with each other – whether monetary or fiscal. However, the current crisis is seeing a painful tradeoff between lives and livelihood. The lockdown implemented to flatten the curve is clearly pulling down the economy just as the stimulus measures intend to keep the economy afloat in the interim. “…in managing the challenge of the CFC, what we are seeing is tension between the various sets of policy actions. The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector. The more stringent the lockdown to save lives, the more extensive the loss of livelihoods. Managing this tension is by far the biggest dilemma for governments battling the crisis.”
Fourth involves the role of China – “The global financial crisis, although it was called “global” did not affect all countries equally and that accounts for the fourth difference between 2008 and now. China was less affected even as all rich countries were in a financial meltdown. In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat. In contrast, now all rich and big economies are weighed down by the virus, and there is not a single large economy to keep the rest of the world afloat. If pandemics are going to be more frequent, as is now suspected, it is all the more important that there is a more enforceable global protocol on early warning and information sharing.
For all their differences, the GFC and CFC are similar in one respect — they both teach us life-enhancing lessons. The GFC forcefully reminded us that greed and avarice will only bring tears in the end. The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology. Hubris is wrong.”

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