Lessons From The Global Financial Crisis Already Forgotten In COVID-19 Response

The policy response from governments and central banks to the COVID-19 pandemic has been swift. Central banks are loosening monetary policy to an extent never seen before, expanding their balance sheets through buying bonds and making more instruments eligible for repo borrowing. Governments are deploying wage subsidies, direct cash assistance to industries, easing of regulations and spending like there is no tomorrow on healthcare. However, many of the lessons from the GFC have fallen by the wayside.

The biggest lesson of the GFC was that community acceptance of support in a crisis depends on a fair distribution of the benefits of that support. Because policymakers messed up the GFC response, saving the financial system but not getting buy-in from the community, a wave of populism rose over the following decade. It took different forms in different countries, but the underlying sense of cynicism and lack of control drove severe changes to how ordinary people perceive and react to bailouts.

I’m making a very simplistic assessment of complex economic history here. Still, based on the massive policy gaps emerging around the world, particularly around gig economy workers and small businesses, there doesn’t seem to be a lot of depth to the details of the response so far. When you start digging into the terms and conditions of different support packages, the difficulty of accessing them means that governments are perhaps unintentionally picking winners and losers in a government-decided economic shutdown.

In the United States, limiting executive compensation to not higher than last year’s executive compensation was one of the limitations placed on the support of large corporations. What does the community think of this? For sure, when your revenue goes to zero, tough decisions will need to be made.

However, a more appropriate approach has been boards and senior executives taking at least 30% pay cuts themselves before proceeding with layoffs or redundancies. It’s not clear if the ESG risk concerns that have arisen over the last decade emerged at some COVID-19 crisis high-level management meetings.

One insight into the importance of lobbyists is the number of industry-specific supports provided around the world. Explicit support includes direct cash payments, wage subsidies, sweetheart loans, and tax breaks or deferrals. Implicit support, which is far harder to calculate the value of, includes easing of regulations, suspension of regulatory activity, postponement of enforcement mechanisms and relaxation of rules previously implemented to avoid the very financial instability that occurred in the GFC.

Overall, there is a lot of risks that temporary support measures in a crisis do not have clear exit criteria. Even if there are time limits in legislation or regulations, they can be extended. And if the collapse of economic activity continues for the rest of 2020 as the world tries to arrest the COVID-19 pandemic health crisis and save lives, the pressure on politicians and policymakers to make these temporary support measures the “new normal” will be immense.

For example, how is universal free childcare going to be unwound? Already, some childcare centres will need to close even with the 50% fee plus JobKeeper supports because of the number of kids withdrawn from their centres. If the policy goal was to keep childcare in operation, how is the logical end game not nationalisation of childcare? If the taxpayer pays for everything anyway, how do officials ensure value-for-money and no rent-seeking? What assurances will the government receive from the sector? What happens to all of the child care subsidy arrangements frozen in time?

As you can see, there are no easy answers. There are very complex policy problems to resolve on the other side of the bridge. A comprehensive review and audit of the money paid out, and implicit support given will be required. The sharing of the economic pain outside of the private sector will be called for if unemployment rises beyond 10%. It will be untenable to have a large group of workers receiving their fortnightly salary uninterrupted while many face unemployment, reduced hours, and suspension of worker’s rights.