What, if anything, can we learn from the 2008 global financial crisis?

George Soros

With a recession more severe than the downturn caused by the global financial crisis of 2008 – and perhaps even the Great Depression – looming large, the temptation to look to the past for clues as to how the coronavirus crisis will play out is understandable. 

But while the past can provide pointers to the future, it's also worth noting that the current situation is unique in so far as it is the result of an orchestrated governmental shutdown of large sections of the global economy. 

According to a recent IMF forecast, the global economy is projected to contract by 3 per cent - which is a sharper downturn than during the 2008–09 financial crisis.

Meanwhile, Goldman Sachs has estimated that developed economies will contract by around 35 per cent in Q1 2020 – four times the 2008 financial crisis low.

American financier George Soros (pictured), founder and chair of the Open Society Foundations, presented a challenge to economists and politicians everywhere recently, when he said that we “missed the opportunity to create a more just economy after the financial crisis of 2008 and provide a social safety net for the workers who are the heart of our societies.”

Soros added: “Today, we must change direction and ask ourselves: What kind of world will emerge from this catastrophe, and what can we do to make it a better one?”

Troy Pospisil, CEO of legal processing platform InCloudCounsel, points to the fact that prior to this crisis, no one had considered the possibility of revenue declining 50-100 per cent within a matter of weeks.

“Now that this scenario has presented itself as a reasonable outcome across many industries, there will likely be a number of ripple effects on how companies are managed and deals are structured,” he says. 
Awareness of liquidity issues will be a massive factor going forward, as companies need a larger cash cushion to ensure that they have enough liquidity for large short-term shocks to performance.

“As a very basic example, companies have gotten in the habit of quickly disposing of balance sheet cash through share buybacks, dividends and debt repayments,” explains Pospisil.

According to Pospisil, the 2008 crisis offers good lessons on how governments can help stabilise economies by providing confidence and liquidity, but that this crisis is fundamentally different.

New York-based Mike McCabe, managing director and global head of business development at MUFG Investor Services, doesn’t believe it is hugely helpful to compare 2008 and the current response to the pandemic as there are not many parallels between the two.

“The 2008 crisis was a credit crisis primarily driven by issues with the securitisation of subprime loans that spread throughout the banking and financial sectors,” he says.

“This crisis is driven by a virus that has forced a sudden stop to the global economy that could have far reaching consequences to the socio-economic behaviour of our society. However, during both we saw stock prices drop, credit markets disrupted and uncertainty in the markets,” he adds.

The benefit of the lessons of 2008, in McCabe’s view, is that governments and central banks understand better that they need to react quickly and forcefully to provide as much support to their economies and citizens as possible.

At the same time, he states, the difference is that the impact on the economy and society [during this crisis] has been swifter and of more magnitude than any other economic shock in our history.

“And, given the unprecedented nature of this crisis, there are no playbooks for a return to 'normal.' All facets of the economy have been impacted with work and life fundamentally altered, with many firms reviewing how they operate, the resiliency of their supply chain, their ability to support a distributed workforce and their physical footprint,” he adds.

The question of “what kind of world will emerge from this catastrophe?” is the pressing one that is difficult to answer, according to McCabe.
“We are just starting to plan for the re-opening of our economies, which is to roll out in phases, and growth is expected to be an uneven progression,” he says.
The private equity industry is sitting on vast amounts of dry powder and can deploy that capital to support private businesses that will be crucial to the recovery, in McCabe's view, by reinforcing the balance sheets of companies they deem viable in the new economy.
"The investment management industry is becoming more focused on ESG and making investments that positively impact the environment and society, which should lead to a better world,” concludes McCabe.