US Economy Faces Unprecedented Recession
Facing plummeting oil prices and the spread of Covid-19, the United States may be on the cusp of a recession much like the one in 2008, and possibly worse. A series of events — all unrelated — have aligned to challenge whether America has built better economic protections in the wake of the 2008 crisis that rippled across the developed world.
What Happened During the Last US Recession?
Sparked from the burst of the US housing bubble and subprime mortgage crisis, the 2008 recession took down automotive companies, the housing industry, and most notably, financial institutions. At its peak, 750,000 jobs were lost per month, according to Politico. Analysts estimate the US could lose up to 1 million jobs or more this time around, but the unpredictable nature of the coronavirus makes it difficult to compare the two events.
The main culprit in 2008 was the banking industry. A severe lack of regulation and willingness to invest in subprime mortgages convinced Congress to completely overhaul the industry in a bid to prevent history from repeating itself.
The result was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave Washington significantly more oversight of financial companies. The law was written to protect banks from themselves as much as it was to prevent them from causing a total economic collapse again. It forbid risky investments and charged two federal agencies with ensuring banks’ compliance.
The Federal Reserve was also barred from singling out businesses to bailout. Consequently, a $180 billion bailout for American International Group, a financial corporation, would not be allowed today as it was in 2008. The Federal Reserve was also slow to drop interest rates in 2008, which only exacerbated the situation.
Former President George W. Bush introduced a stimulus package to send Americans checks to every American and Speaker of the House Nancy Pelosi was all for the notion.
Today’s Crisis: Uncharted Waters
Now, the US economy is in both uncharted but eerily familiar waters. As a result, the response from the Trump administration — after POTUS stopped calling the coronavirus a Democrat hoax — has been a deluge of tactics borrowed from 2008 and some newly-developed strategies.
Firstly, it must be understood that the threat the US economy faces today is inherently different than 2008. Before the coronavirus outbreak was fully realized, Russia and Saudi Arabia decided to go to war over oil prices, an idea driven primary by Russian President Vladimir Putin’s desire to put American shale out of business. Would that have been sufficient to cripple the US economy? Probably not, but it should be noted that America became the top producer of oil under President Donald Trump.
Brent crude is now at below $30 per barrel and Goldman Sachs reversed its second-quarter estimates to predict $20 on the horizon, a level not seen in nearly 20 years. The US oil industry is bracing for losses as high as 200,000 jobs.
“We have never seen this before — to have a demand shock and a supply shock at the same time,” said Paige Meyer, energy analyst for CFRA Research.
Companies have already cut back on spending by an average of 40%. Moody’s rating agency said the simultaneous effects of supply and demand shock has put the entire world at risk of a recession, calling it a “distinct possibility.”
As oil falls, so does the value of other industries. The only upside of lower prices — cheaper prices at the pump — this time around it won’t be of much help because people are locked in their homes due to Covid-19.
Tactics: Mix of Old and New
Trump — who is on a mission to stave off the recession as best as he can — ordered the Federal Reserve to slash interest rates to almost zero. But interest rates weren’t exactly high to begin with and what exactly can people do with the lower rates amid the coronavirus outbreak? In 2008, lower interest rates allowed people to put more money into the economy, to feel secure about buying homes again as they rebuilt their lives.
In 2020, consumers have no idea how long the virus outbreak will cripple their lives. They don’t know if they will be hospitalized next week and they can’t even go out and buy cars or homes because businesses are closed.
Trump and Pelosi teamed up to retry the Bush-era stimulus idea, but how great of an impact will it have when people can’t leave their homes? The money, if approved by Congress, will likely go toward necessities and bill payments, especially for people foregoing paychecks due to Covid-19.
Covid-19 has struck the US economy in a way that it has never been hit before. In 2008, there were easily-identifiable industries that were impacted and could be saved by Washington. Covid-19 makes no such distinctions and, worse, hurts multiple key industries simultaneously: travel, airlines, oil, banks, retail, and so on.
Due to the nature of the threat, Trump has rallied American manufacturers to produce medical supplies and dispatched Navy hospital ships to assist with emergency responses. Trump is trying old and new ideas, but it is far too early to accurately gauge their full effect. The only thing certain at the present time is that the US economy is entering a dark period that has no precedent.