Bernanke On How Coronavirus Differs From The 2008 Economic Crisis

The 2008 financial crisis was the result of the collapse of the financial system but the coronavirus could have the opposite impact of trickling its way towards the financial system, according to former Fed Chairman Ben Bernanke.

Different Type of Financial Crisis

The 2008 crisis started with the implosion of subprime mortgages and the loss of confidence in the financial system, Bernanke said Wednesday on CNBC. When credit "broke down" the damage at banks made its way to the economy.

But the coronavirus is forcing a shutdown of the economy and implies banks that lend to companies that are on pause or closing down are taking losses.

Fortunately, Bernanke said the banking system as a whole was in a much better position of strength compared to 2007 so it could "stand up under the strain" and become a positive force in returning to normalcy.

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Unemployment

Federal Reserve Bank of St. Louis President Jim Bullard told CNBC prior to Bernanke's interview he expects the unemployment rate to soar to 30% by the second or third quarter, only to return back to around 4% by the end of next year. Bernanke said this scenario is "possible" if there's a "very sharp and short recession."

The notion of a "snap-back" in the economy depends on the course of the virus itself, which dictates how long the economy will remain in shutdown mode. Over this period, the economy needs to at the very least remain "functioning" and businesses need access to funding to survive the storm and re-open in the future.

Monetary Policy

Monetary policies coming from central banks are certainly "part of the mix" in this type of crisis, he said. The U.S. Federal Reserve slashed interest rates close to zero and is overseeing a new quantitative easing program. But monetary policy isn't meant to encourage people to go out and buy items so the Fed is tapping its lending power capabilities.

However, no policy or set of policies can work unless the public health issue is resolved first, he said.

"If we can get that straight, then we know how to get the economy working again," Bernanke said. "Monetary and fiscal policy can do their thing and we won't have anything like the extended downturn we saw even in the Great Recession much less the Great Depression of the '30s.